5 6075615090009178251

PAPER – 5: ADVANCED MANAGEMENT ACCOUNTING
Question No.1 is compulsory.

Answer any five questions from the remaining six questions.
Working notes should form part of the respective answers.
No statistical or other table will be provided with this question paper.
Question 1
(a) JPR Limited manufactures three products by using a single machine which has 2,40,000
bottleneck hours per month. The details with regard to the three products are as under:
Products
P1 P2 P3
Selling price per unit (`) 170 140 180
Direct Material cost (`) 80 90 120
Direct Labour cost (`) 30 25 35
Other Expenses (`) 10 10 5
Maximum Demand (units) 20,000 15,000 25,000
Time required per unit (hours) 6 4 3
Required
Based on the concept of throughput accounting, calculate the optimum number of units to
be produced for each product. (5 Marks)
(b) Hotel Park has four holiday resorts in a hill station. All the resorts are having equal carpet
area but the facilities available are varying from each other. During a festival holiday four
persons approached to reserve a resort for their family stay during the holiday on the same
day. They were asked to quote their order of preference and the rent they are willing to
pay per day. The particulars collected from them are given below:
Persons Rent quoted per day (`)
Resort -1 Resort-2 Resort-3 Resort-4
P1 6,000 5,000 No quotation No quotation
P2 4,000 6,000 4,000 1,000
P3 3,000 6,000 2,000 4,000
P4 6,000 4,000 No quotation No quotation
Required
Decide an allocation that will maximize the per day revenue of the hotel and the amount
of revenue possible from the allocation. (5 Marks)
2 FINAL (OLD) EXAMINATION: MAY, 2019
(c) The details of the output presently available from a manufacturing department of JB Ltd.
are as follows:
Average output per week 50,000 units from 200 employees.
Saleable value of output………………………………………………………. ` 6,25,000
Contribution made by the output toward fixed expenses and profit………` 2,75,000
The Board of Directors plans to introduce more automation in the department at a capital
cost of ` 12,50,000. The effect of this will be to reduce the number of employees to 160,
but to increase the output per individual employee by 60%. To provide the necessary
incentive to achieve the increased output the Board intends to offer 1% increase in the
piecework rate of one rupee per article for every 2% increase in average individual output
achieved. To sell the increased output, it will be necessary to decrease the selling price
by 4%.
Required
Calculate the extra weekly contribution resulting from the proposed changes. (5 Marks)
(d) The output of a production line is checked by an inspector for one or more of three different
types of defects, called D1, D2 and D3. If defect D1 occurs, the item is scrapped. If defect
D2 and D3 occurs, the item must be reworked. The time required to rework a D2 defect is
10 minutes and the time required to rework a D3 defect is 20 minutes. The probabilities of
D1, D2 and D3 defects are 0.20, 0.12 and 0.15 respectively.
Use the following random numbers for simulation:
RN for Defect D1 93 83 55 63 40 91 47 63 01 52
RN for Defect D2 79 10 36 13 04 57 57 13 55 09
RN for Defect D3 20 56 95 11 96 18 52 11 84 03
For ten items coming of the assembly line, you are required to calculate:
(i) The total number of items without any defects
(ii) The number of items scrapped
(iii) The total minutes of rework time (5 Marks)
Answer
(a) Statement Showing Optimum Units to be produced
Particulars P1 P2 P3
Selling Price per unit (`) 170 140 180
Direct Material Cost per unit (`) 80 90 120
Throughput per unit (`) 90 50 60
PAPER – 5: ADVANCED MANAGEMENT ACCOUNTING 3
Time Required per unit (hrs.) 6 4 3

Return per Machine Hour (`) 15 12.50 20
Rank II III I
Allocation of Machine Time (hrs.) 1,20,000 45,000 75,000
(20,000 units × (Balance) (25,000 units ×
6 hrs.) 3 hrs.)
Production (units) 20,000 11,250 25,000
(45,000 hrs. / 4
hrs.)
(b) The objective of the given problem is to identify the preferences of families about resorts
so that hotel management could maximize its profit.
To solve this problem first convert it to a minimization problem by subtracting all the
elements of the given matrix from its highest element. The matrix so obtained which is
known as loss matrix is given below-
Loss Matrix/Resort
Persons Resort-1 Resort-2 Resort-3 Resort-4
P1 0 1,000 X X
P2 2,000 0 2,000 5,000
P3 3,000 0 4,000 2,000
P4 0 2,000 X X
Now we can apply the assignment algorithm to find optimal solution. Subtracting the
minimum element of each column from all elements of that column-
Loss Matrix/Resort
P1 0 1,000 X X
P2 2,000 0 0 3,000
P3 3,000 0 2,000 0
P4 0 2,000 X X
The minimum number of lines to cover all zeros is 3 which is less than the order of the
square matrix (i.e.4), the above matrix will not give the optimal solution. Subtracting the
minimum uncovered element (1,000) from all uncovered elements and add it to the
elements lying on the intersection of two lines, we get the following matrix-
Loss Matrix/Resort
P1 0 0 X X
P2 3,000 0 0 3,000
P3 4,000 0 2,000 0
P4 0 1,000 X X
Since the minimum number of lines to cover all zeros is 4 which is equal to the order of
the matrix, the above matrix will give the optimal solution which is given below-
Loss Matrix/Resort
P1 0 0 X X
P2 3,000 0 0 3,000
P3 4,000 0 2,000 0
P4 0 1,000 X X
Optimal Schedule is-

Persons Resort Revenue (`)
P1 2 5,000
P2 3 4,000
P3 4 4,000
P4 1 6,000
Total 19,000
(c) Workings
Present average output per employee and total future expected output per week
Present average output per employees per week
 50,000 units 
=  
 200 employees 
= 250 units
Total Future expected output per week = Total number of future employees ×
(present output + 60% of present output per
employee)
= 160 employees × (250 units + 60% × 250

units)
= 64,000 units
Present piece work rate and proposed piece work rate
Present piece work rate = ` 1.00 per unit
Proposed piece work rate = Present piece work rate + 30% × ` 1
= ` 1.00 + 0.30 P
= ` 1.30 per unit
Present and proposed sale price per unit
Present sales price per unit = ` 12.50
(` 6,25,000/ 50,000 units)
Proposed sales price per unit = ` 12.00
(` 12.50 - 4% of ` 12.50)
Marginal Cost (excluding wages)
Present marginal cost (excluding wages) per unit =
 Present Sales Value - Fixed Expenses & Profits - Present Wages 
 
 Present Output (in units) 
 ` 6,25,000 - ` 2,75,000 - ` 50,000 
=  
 50,000 units 
= `6
Statement of Extra Weekly Contribution
Expected Sales Units 64,000
Sales Value (64,000 units × ` 12) 7,68,000
Less: Marginal Costs Ex. Wages (64,000 units × ` 6.00) 3,84,000
Less: Wages (64,000 units × ` 1.30) 83,200
Marginal Contribution 3,00,800
Less: Present Contribution 2,75,000
Increase in Contribution (per week) 25,800
(d) Workings
Probability Distribution (Defect D1)
Event Probability Cumulative Probability Random Numbers
Defect 0.20 0.20 0-19
No defect 0.80 1.00 20-99
Defect 0.12 0.12 0-11
No defect 0.88 1.00 12-99
Defect 0.15 0.15 0-14
No defect 0.85 1.00 15-99
Simulation Sheet
Trial Random Numbers Event Time required
D1 D2 D3 Defect D1 Defect D2 Defect D3 to rework
1 93 79 20 No No No --
2 83 10 56 No Yes No 10 m
3 55 36 95 No No No ---
4 63 13 11 No No Yes 20 m
5 40 04 96 No Yes No 10 m
6 91 57 18 No No No ---
7 47 57 52 No No No ---
8 63 13 11 No No Yes 20m
9 01 55 84 Yes No No Scrapped
10 52 09 03 No Yes Yes 10 m+20 m
90m
(i) Total Number of Items without any defects = 4 items
(ii) The number of items scrapped = 1 item
(iii) The total minutes of rework time = 90 minutes
Question 2
(a) ABC Ltd. is engaged in production of four products, the relevant information of products
are as follows:
Products L M N O
Output in units 66,000 60,000 45,000 57,000
Selling price (in `) 300 320 210 200
Cost per unit:
Direct Material (in `) 80 100 70 60
Direct Labour (in `) 48 35 40 20
Machine hours (per unit) 5 4 3 4
Market research has indicated that if ABC Ltd. can reduce the selling prices of the products
by 5%, it will be useful in getting bulk orders and gain significant share of market share of
those products. The company's profit mark up is 25% on cost of the products.
The four products are produced in production run of 300 units and sold in batches of 150
units. The production overhead is currently absorbed by using a machine hour rate and
the total of the production overheads for the period has been analysed as follows:
Particulars `
Machine departmental costs 83,97,000
Set up costs 20,90,000
Stores receiving 19,50,000
Inspection/Quality control 11,40,000
Material handling & dispatch 15,20,000
The cost drivers to be used for the overhead costs are as follows:
Costs Cost drivers
Set up costs Number of production runs
Stores receiving Requisition raised
Inspection/quality control Number of production runs
Material handling & dispatch Order executed
The number of requisitions raised in the stores was 1,250 for each product and the total
number of orders executed was 1,520, each order being for a batch of 150 units of a
product.
You are required to calculate:

(i) Target cost for each product.
(ii) Total overhead cost of each product using Activity Based Costing.
(iii) Compare per unit target cost and per unit activity based cost of each product and
comment whether the price reduction is profitable or not. (10 Marks)
(b) The "Bollywood theatre Company" owned a theatre and plays three shows each day on
weekends - Saturday & Sunday, in the year of 52 weeks. The total capacity of the theatre
is 1,000 seats which is divided into three classes are as follows:
Royal - First 5 rows of 40 seats per row
Premium - The next 10 rows of 35 seats per row
Classic - The next 15 rows of 30 seats per row
Costs data with regard to show for the year will be as follows:
Employees No of Employees Salaries p.m. (in `)
Manager 2 ` 62,500 each
Gate-keeper 15 ` 15,000 each
Operators 3 ` 30,000 each
Clerks 5 ` 22,000 each
Other costs for the year are as follows;
Electricity & oil 1,67,400
Carbon 72,530
Misc. Expenditure 64,880
Advertisement 88,080
Administrative Expenses 1,14,610
The premises is valued at ` 35,00,000 and the estimated life is 14 years.
Projectors and other equipments costs `8,70,000 on which 15% depreciation is to be
charged.
Other relevant information are as follows:
(i) 20% of the total seats of each class remains vacant
(ii) Every time a show is staged, one row of Royal circle is occupied free of charge, by
virtue of passes granted to the guests.
(iii) Weightage to be given to the three classes in the ratio 3:2:1
Required
Determine the proceeds per Man show and rates for each class if the management expects
25% return on gross proceeds.
Answer
(a) (i) Cost of Products Under ‘Target Costing’
Statement Showing “Cost per unit”
Particulars L M N O
Selling Price 300.00 320.00 210.00 200.00
Less: Reduction in Selling Price by 5% 15.00 16.00 10.50 10.00
Estimated Selling Price after reduction in price 285.00 304.00 199.50 190.00
Profit Mark up 25% on Cost
57.00 60.80 39.90 38.00
(20 % on Selling Price)
Target Cost of Production (per unit) 228.00 243.20 159.60 152.00
(ii) Overhead Cost of Product Under ‘Activity Based Costing’
Particulars L M N O
Machine Department 29,70,000 21,60,000 12,15,000 20,52,000
Cost (3,30,000×9) (2,40,000×9) (1,35,000×9) (2,28,000×9)
Setup Cost 6,05,000 5,50,000 4,12,500 5,22,500
(220×2,750) (200×2,750) (150×2,750) (190×2,750)
Stores Receiving Cost 4,87,500 4,87,500 4,87,500 4,87,500
(1,250×390) (1,250×390) (1,250×390) (1,250×390)
Inspection and Quality 3,30,000 3,00,000 2,25,000 2,85,000
Control Cost (220×1,500) (200×1,500) (150×1,500) (190×1,500)
Material Handling and 4,40,000 4,00,000 3,00,000 3,80,000
Dispatch (440×1,000) (400×1,000) (300×1,000) (380×1,000)
Total O/H Cost 48,32,500 38,97,500 26,40,000 37,27,000
No. of Units 66,000 units 60,000 units 45,000 units 57,000 units
O/h Cost per unit 73. 22 64.96 58.67 65.39
Working Notes
Calculation of “Activity Rate”
Cost Pool Cost (`) Cost Driver Cost Driver Cost Driver
Quantity Rate (`)
[A] [B] [C] [D] = [A]÷[C]
Machine Department 83,97,000 Machine Hours 9,33,000 9
Cost
Setup Costs 20,90,000 No. of Production Runs 760 2,750
Stores Receiving 19,50,000 No. of Requisitions 5,000 390
Raised
Inspection/ Quality 11,40,000 No. of Production Runs 760 1,500
Control
Material Handling and 15,20,000 No. of Orders Executed 1,520 1,000
Dispatch
Calculation of Cost Driver Quantity
Particulars L M N O Total
Machine Hours 3,30,000 2,40,000 1,35,000 2,28,000 9,33,000
(Output × M/c hrs.)
No. of Requisitions Raised in the 1,250 1,250 1,250 1,250 5,000
Stores
No. of Production Runs 220 200 150 190 760
(Output/300)
No. of Orders Executed 440 400 300 380 1,520
(Output/150)
Cost of Products Under ‘Activity Based Costing’
Particulars L M N O
Direct Material Cost 80.00 100.00 70.00 60.00
Direct Labour Cost 48.00 35.00 40.00 20.00
O/H Cost 73.22 64.96 58.67 65.39
Cost Per unit 201.22 199.96 168.67 145.39
(ii) Comparative Analysis of ‘Cost of Production’
Particulars L M N O
(a) As per Target Costing 228.00 243.20 159.60 152.00
(b) As per Activity Based Costing 201.22 199.96 168.67 145.39
…(a) – (b) 26.78 43.24 (9.07) 6.61
Comment
The total cost (ABC) of L, M and O product is less than the target cost so there is no
problem in reducing the selling price of these products by 5% from the present price.
It will increase the profitability of the company but the cost of N is slightly more than
the target cost, it is therefore, suggested that the company should either control it
or redesign it.
(b) (i) Statement Showing Proceeds per Man Show
Particulars Amount (`)
Salary
-Manager (2 no. × ` 62,500 × 12 m) 15,00,000
-Gate Keeper (15 no. × ` 15,000 × 12 m) 27,00,000
-Operators (3 no. × ` 30,000 × 12 m) 10,80,000
-Clerks (5 no. × ` 22,000 × 12 m) 13,20,000
Electricity & Oil 1,67,400
Carbon 72,530
Misc. Expenditure 64,880
Advertisement 88,080
Administrative Expenses 1,14,610
Depreciation on Premises (` 35,00,000/ 14y) 2,50,000
Depreciation on Projector and Other Equipment (15% of 8,70,000) 1,30,500
Total Annual Cost 74,88,000
Add: Margin (74,88,000 × 1/3) 24,96,000
Total Annual Proceeds 99,84,000
Total Man Shows (52 Weeks × 2 Days × 3 Shows × 1,280*) 3,99, 360
Proceeds per Man Show 25
Workings (*)
Particulars Royal Premium Classic Total
Gross Seats 200 350 450 1,000
Less: Vacant @20% 40 70 90 200
Less: Free Seats 40 --- --- 40
Saleable Seats 120 280 360 760
Weight 3 2 1 ---
Weighted Seats 360 560 360 1,280
(ii) Statement Showing Rates for Each Class

Particulars Royal Premium Classic
Rate = 75 = 50 = 25
(25×3) (25×2) (25×1)
Question 3
(a) JKL Ltd. is engaged in marketing of wide range of consumer goods. A, B, C and D are the
zonal sales officers and the company fixes annual sale target for them individually.
You are furnished with the following :
(1) The standard costs of sales target in respect of A, B, C and D are ` 5,82,250,
` 4,50,500, ` 4,93,000 and ` 5,35,500 respectively.
(2) A, B, C and D respectively earned ` 40,800, ` 32,400, ` 35,520 and ` 38,700 as
commission at 6% on actual sales effected by them during the previous year.
(3) The relevant variances as computed by a qualified cost accountant are as follows :
A B C D
Particulars
(`) (`) (`) (`)
Sales Price Variance 6,000 (F) 8,000 (A) 7,000 (A) 5,000 (A)
Sales Volume Variance 11,000 (A) 18,000 (F) 19,000 (F) 20,000 (F)
Sales Margin Mix Variance 10,750 (A) 5,500 (F) 12,000 (F) 9,500 (A)
Assume sales margin quantity variance is zero.
Required
(i) Compute the amount of sales target fixed and the actual amount of margin earned in
case of each of the zonal sales officer.
(ii) Evaluate the overall performance of these zonal sales officers taking three relevant
base factors and then recommend whose performance is the best. (10 Marks)
(b) Rose Ltd., has produced its first 10 units whose cost details are as given.
`
Material 5,000
Labour @ ` 20 p.u. 6,000
Variable overhead 2,000
Other expenses 3,000
Machine set up costs 4,000
Variable overhead is directly proportionate to labour cost and other expenses constitute
one-half of labour cost. Machine set-up costs were fully recovered from the first order.
From one machine set-up, 100 units can be produced.
The customer who purchased the above mentioned 10 units asked to quote price for
another 30 units.
Required
Estimate the price to be quoted for the 30 units so as to earn a profit of 20% on cost by
using 80% learning curve effect. (6 Marks)
Answer
(a) (i) Statement Showing “Sales Target Fixed & Actual Margin”
(`)
Particulars Zonal Sales Officers
A B C D
Commissioned Earned 40,800 32,400 35,520 38,700
Actual Sales 6,80,000 5,40,000 5,92,000 6,45,000
(Commission Earned / 6%)
Sales Price Variance 6,000(F) 8,000(A) 7,000(A) 5,000(A)
Sales Volume Variance 11,000(A) 18,000(F) 19,000(F) 20,000(F)
Sales Target (Budgeted Sales) 6,85,000 5,30,000 5,80,000 6,30,000
Standard Cost of Sales Target 5,82,250 4,50,500 4,93,000 5,35,500
Budgeted Margin 1,02,750 79,500 87,000 94,500
Sales Margin Mix Variance 10,750(A) 5,500(F) 12,000(F) 9,500(A)
Sales Price Variance 6,000(F) 8,000(A) 7,000(A) 5,000(A)
Actual Margin 98,000 77,000 92,000 80,000
(ii) Statement Showing “Evaluation of the Performance of Zonal Sales Officers”
Particulars Zonal Sales Officers
A B C D
Efficiency towards the Target Sales
(a) Whether target achieved No Yes Yes Yes
(b) Actual Sales to Target Sales 99.27% 101.89% 102.07% 102.38%
Ratio
(c) Rank IV III II I
Margin Approach
(a) Margin Earned (`) 98,000 77,000 92,000 80,000

(b) Rank I IV II III
Margin Vs Sales Ratio
(a) Budgeted Margin/Sales Target 15.00% 15.00% 15.00% 15.00%
Ratio
(b) Actual Margin Vs Actual Sales 14.41% 14.26% 15.54% 12.40%
Ratio
(c) Rank II III I IV
An analysis on performance of four Zonal Sales Officers based on three base factors,
the performance of Officer C is the best.
(b) Estimated Price for 30 Units
Particulars (`) (`) (`)
10 Units 40 Units 30 Units
(1 Batch) (4 Batches)
Material 5,000 20,000 15,000
Labour 6,000 15,360$ 9,360
$(300 hrs. × 0.80 × 0.80 × 4 batches ×` 20.00)
Variable Overhead [@33.33….% of L] 2,000 5,120 3,120
Other Expenses [1/2 of L] 3,000 7,680 4,680
(assumed variable)
Machine Setup 4,000 4,000 ---
Total Cost 20,000 52,160 32,160
Add: Profit @ 20% 6,432
Price to be Quoted 38,592
Question 4
(a) PS Ltd. is producing a single product currently working at 80% capacity by producing 6,000
units per month. From 4 units of raw material it produces 5 units of finished product. The
raw material required for production is available both in open market price and controlled
price. The company is eligible to receive 3,500 units of raw material every month at
controlled price from the Government at the rate of ` 200 p.u. Additional materials required
for production can be procured from the open market at the rate of `260 p.u. Out of the
monthly total cost of production, the fixed cost is amounted to `4,00,000 and the balance
comprised of material cost and other variable costs. Productions are sold at ` 700 p.u.
which includes 20% profit on sales.
The company wants to work at full capacity as it has good demand for its product. Assume
that there will be no change in material prices.
Required
Compute the minimum selling price per unit to be maintained by the company when it is
working at full capacity and wants to earn:
(i) the same amount of profit as it can earn at 80% capacity.
(ii) the same rate of profit as it can earn at 80% capacity. (8 Marks)
(b) Veda Ltd. has two divisions DV1 and DV2 which are treated as separate profit centres and
are given autonomy to fix transfer prices and to select suppliers. DV1 produces one product
which can be sold internally to DV2 and externally in the open market. It is the practice of
the company to measure the performance of the divisions by fixing target profit for each
period. For a particular period the following details of DV1 are given to you:
Installed capacity 6,000 units
Variable cost p.u. ` 600
Selling price in open market ` 900 p.u
Open market demand 4,500 units
Selling commission ` 80 p.u.
Total fixed cost ` 7,05,000
Target profit fixed ` 6,65,0000
DV2 procure its material requirements from DV1 and from one external supplier who is
ready to supply all the requirements of the division. During this period DV2 has asked DV1
to quote a price for 2,000 units.
You are required:
(i) to determine the transfer price to be quoted to DV2 so as to enable DV1 to achieve
the target profit.
(ii) Calculate the two prices DV1 would have to quote to DV2 if it became company policy
to Quote transfer price on opportunity costs. (8 Marks)
Answer
(a) (i) Statement Showing Minimum Selling Price at Full Capacity “Same Amount of
Profit”
Raw Material 13,50,000
[`200 × 3,500 units + `260 × (6,000 units/80% × 4/5 – 3,500)]
Other Variable Costs (`19,22,000 /80%) 24,02,500
Fixed Cost 4,00,000

Total Cost at Full Capacity 41,52,500
Add: Desired Profit (`700 × 20% × 6,000 units) 8,40,000
Total Sales 49,92,500
Units 7,500
Minimum Selling Price per unit 665.67
Workings
Statement Showing ‘Other Variable Costs’
Current Cost of Sales (`700 × 80% × 6,000 units) 33,60,000
Less: Raw Material 10,38,000
[`200 × 3,500 units + `260 × (6,000 units × 4/5 – 3,500)]
Fixed Cost 4,00,000
Other Variable Costs 19,22,000
(ii) Statement Showing Minimum Selling Price at Full Capacity “Same Rate of
Profit”
Raw Material 13,50,000
[`200 × 3,500 units + `260 × (6,000 units/80% × 4/5 – 3,500)]
Other Variable Cost (`19,22,000 /80%) 24,02,500
Fixed Cost 4,00,000
Total Cost at Full Capacity 41,52,500
Add: Desired Profit (`41,52,500 / 80 × 20) 10,38,125
Total Sales 51,90,625
Units 7,500
Minimum Selling Price per unit 692.08
(b) Target Profit ` 66,50,000
(i) Transfer Price per unit of DV1 ’s Product that should Quote in order to meet
Target Profit
Quotation for the 2,000 units of DV1’s Product should be such that meet Division DV1
target profit. Therefore, the minimum quote for DV1 ’s Product will be calculated as
follows:

Target Profit (given for the year) 66,50,000
Add: Fixed Cost 7,05,000
Target Contribution 73,55,000
Less: Contribution Earned – External Sales 8,80,000
{4,000 units × (` 900 – ` 600 – ` 80)}
Contribution Required – Internal Sales 64,75,000
Contribution per unit of Product (` 64,75,000 ÷ 2,000 units) 3,237.50
Transfer Price of Product DV1 to Division DV2 3,837.50
(Variable Cost per unit + Contribution per unit)
Note: Selling commission will be not incurred on internal transfer units

(ii) The Two Transfer Prices Based on Opportunity Costs
For the 1,500 units (i.e. maximum capacity – maximum external market demand) at
variable cost of production i.e. ` 600 per unit.
For the next 500 units (i.e. external market demand – maximum possible sale) at
market selling price i.e. ` 900 per unit. (Variable Cost + Opportunity Cost)
Target Profit ` 6,65,000/-
(i) Transfer Price per unit of DV1 ’s Product that should Quote in order to meet
Target Profit
Quotation for the 2,000 units of DV1’s Product should be such that meet Division DV1
target profit. Therefore, the minimum quote for DV1 ’s Product will be calculated as
follows:
Target Profit (given for the year) 6,65,000
Add: Fixed Cost 7,05,000
Target Contribution 13,70,000
Less: Contribution Earned – External Sales 8,80,000
{4,000 units × (` 900 – ` 600 – ` 80)}
Contribution Required – Internal Sales 4,90,000
Contribution per unit of Product (` 4,90,000 ÷ 2,000 units) 245
Transfer Price of Product DV1 to Division DV2 845
(Variable Cost per unit + Contribution per unit)
Note: Selling commission will be not incurred on internal transfer units

(ii) The Two Transfer Prices Based on Opportunity Costs

For the 1,500 units (i.e. maximum capacity – maximum external market demand) at
variable cost of production i.e. ` 600 per unit.
For the next 500 units (i.e. external market demand – maximum possible sale) at
market selling price i.e. ` 900 per unit. (Variable Cost + Opportunity Cost)

This question has been solved in two alternative ways by taking ‘Target profit fixed’ as
`6,65,000 and `66,50,000 respectively.
Question 5
(a) PRP Industries has three factories at locations L1, L2 and L3 which supply cement to
warehouses located at A, B and C. Monthly factory capacities are 10, 80 and 15 tonnes
respectively and monthly warehouse requirements are 75, 20 and 50 tonnes respectively.
The shipping costs per tonnes in rupees are given below:
Factories Warehouses
A B C
L1 5 1 7
L2 6 4 6
L3 3 2 5
If any of the demand of any warehouse is not being satisfied, the unsatisfied demands at
the warehouse A, B and C are subject to a penalty of `8, ` 5 and `3 per tonne respectively.
Required
(i) Find the initial feasible solution by using Vogel’s Approximation method.
(ii) Perform optimality test and final transportation and penalty cost associated with the
solution. (Vf = 0) (8 Marks)
(b) Following information are taken from the records of PV Ltd.:
Budgeted sales for June, 2019 : ` 5,00,000
Budgeted sales for July, 2019 : ` 6,00,000
Materials are purchased @ 70% of selling price of finished goods.
Selling Commission is paid @ 10% on sales in the month of sales itself.
Monthly operating expenses (including depreciation) ` 1,10,000
Cash balance as on 31st May, 2019 ` 75,000

Actual sales in May, 2019 ` 4,00,000
Stock of materials is maintained equal to 100% of next month’s requirements.
For purchase of materials 40% paid in the month of purchase and the balance in the
following month.
Out of sales, 50% collected immediately and the balance collected in the next month.
All other expenses are paid in the respective month.
The company planned to declare 10% dividend in June, 2019, payable in August 2019.
The authorized and paid up capitals are respectively ` 80 lakhs and ` 50 lakhs.
Depreciation is charged under straight line method @ 15% p.a. on the fixed assets worth
` 20 lakhs.
Required
Prepare a cash Budget for the month of June, 2019. (8 Marks)
Answer
(a) (i) The Initial Feasible Solution
Since requirement 145 (75 + 20 + 50) is greater than capacity 105 (10 + 80 + 15) by
40 units, the given problem is an unbalanced one. We introduce a dummy factory
with a supply of 40 units. It is given that for the unsatisfied demands, the penalty cost
is rupees 8, 5, and 3 for Warehouses (A), (B) and (C) respectively. Hence, the
transportation problem becomes-
Factory Warehouses Capacity

A B C
L1 5 1 7 10
L2 6 4 6 80
L3 3 2 5 15
Dummy 8 5 3 40
Requirements 75 20 50 145
A B C Supply Difference
L1 10
5 1 7 10/0 4 - -
L2 60 10 10
6 4 6 80/70/10/0 2 2 2
L3 15
3 2 5 15/0 1 1 -
40
Dummy 8 5 3 40/0 2 2 2
Demand 75/60/0 20/10/0 50/10/0 145

2 1 2
Difference
3 2 2
2 1 3
The initial solution is given in the table below-
A B C Supply
L1 10
5 1 7 10
L2 60 10 10
6 4 6 80
L3 15
3 2 5 15
40
Dummy 8 5 3 40
Demand 75 20 50 145
(ii) Optimality Test
The number of allocations is 6 which is equal to the required m + n - 1 (= 6)
allocations. Also, these allocations are in dependent. Hence, both the conditions are
satisfied.
We now apply the optimality test to find whether the initial solution found above is
optimal or not.
Let us now introduce ui [i = (1, 2, 3, 4)] and vj [j = (1, 2, 3)] such that ∆ij = Cij – (ui +
vj) for allocated cells. We assume that v1 = 0 and remaining ui’s, v j’s and ∆ij’s are
calculated as below-
(ui + vj) Matrix for Allocated / Unallocated Cells
ui
3 1 3 3
6 4 6 6
3 1 3 3
3 1 3 3
vj 0 -2 0
Now we calculate ij = Cij – (ui + vj) for non basic cells which are given in the table
below-
ij Matrix
2 4
1 2
5 4
Since all ∆ij’s for non basic cells are positive, therefore, the solution obtained above
is an optimal one. The allocation of factories to destinations and their cost is given
below-
Factory Warehouses Units Cost (`) Total Cost (`) Type
L1 B 10 1 10
L2 A 60 6 360 Transportation
L2 B 10 4 40 Cost
L2 C 10 6 60 `515/-
L3 A 15 3 45
Dummy C 40 3 120 Penalty Cost
Total 635

This question has been solved by taking v1 as ZERO and can also be solved by taking
other alternative options, for example, u 2 as ZERO.
(b) PV Ltd.
Cash Budget for Jun 2019
Particulars (`)
Opening Balance: 75,000
Receipts:
Cash Collection 2,50,000
(50% of current month’s sales i.e. ` 5,00,000)
From Debtors 2,00,000
(50% of last month’s sales i.e. ` 4,00,000/-)
Total Cash Available …(A) 5,25,000
Payments:
Purchase of Material 1,68,000
(40% of next month’s requirement i.e.70% of 6,00,000)
To Creditors 2,10,000
(60% of last month’s purchase i.e. 70% of 5,00,000)
Sales Commission 50,000
(10% of current month’s sales i.e. 5,00,000)
Monthly Cash Operating Expenses 85,000
(` 1,10,000 - `20L × 15%/12)
Dividend Paid ---
Total Payments …(B) 5,13,000
Closing Balance …(A-B) 12,000
Question 6
(a) Madura Ltd. is manufacturing three products. The selling price and production costs for
the products for next year are estimated as given below:
P Q R
(` ) (`) (`)
Selling price 38 78 145
Direct material cost 12 20 25
Direct labour cost 15 27 60

Variable overheads 6 13 30
Total fixed overhead is estimated as ` 30,000 for the year and direct labour is calculated
at the rate of ` 3 per hour. It is also planned to use the available labour hours to produce
800 units of each product to meet out the demand of regular customers and the balance
hours to produce Product P. Total labour hours available for the year will be 39,800.
Required:
(i) Prepare an income statement for the above proposal.
(ii) If you feel that there is an alternative proposal which would be more profitable than
the above one, prepare an income statement for the same. Assume that all the units
to be produced can be sold in the market. (8 Marks)
(b) A manufacturing company manufactures a product and sells its through four dealers D1 ,
D2, D3 and D4. The transaction details with the dealers during a period is given below:
D1 D2 D3 D4
Selling price p.u. (`) 200 200 200 200
No. of units sold 2,000 3,000 5,000 4,000
Size of order (units) 500 300 250 400
Units delivered per delivery 250 300 250 200
No. of sales visits 8 3 10 2
No. of speed deliveries in total deliveries 1 - 2 -
Distance per delivery (km.) 15 20 10 30
No. of warranty complaints - 8 - 9
Additional information:
Order processing cost ` 50 per order
Cost per sales visit ` 2,000
Product handling expenses ` 0.20 p.u.
Ordinary delivery cost per km `3
Speed delivery cost per km `5
Cost of production 60% of sales
Average expenses per warranty complaint ` 6,000
Required
Analyze the profitability for each dealer, which dealer is the most profitable. (8 Marks)
Answer
(a) (i) Statement Showing “Calculation of Contribution/ unit”
P Q R
(`) (`) (`)
Selling Price 38 78 145
Less: Variable Costs
Direct Material 12 20 25
Direct Labour 15 27 60
(`3×5h) (`3×9h) (`3×20h)
Variable Overheads 6 13 30
Contribution per unit 5 18 30
Labour Hours Allocation
39,800 hrs. 4,000 hrs. 7,200 hrs. 16,000 hrs. 12,600 hrs.
Total (800 units × 5h) (800 units × 9h) (800 units × 20h) (2,520×5h)
P Q R P (Balance)
Income Statement
Product No of Units Contribution/unit Total Cont.
(`) (`)
P 800+2,520 5 16,600
Q 800 18 14,400
R 800 30 24,000
Total Contribution 55,000
Less: Fixed Overheads 30,000
Net Profit 25,000
(ii) Statement Showing “Calculation of Contribution/ hour”
P Q R
(`) (`) (`)
Contribution per unit 5 18 30
Hours per unit 5 9 20
Contribution per hour (`) 1 2 1.5
Ranking III I II
Optimum Labour Hours Allocation

39,800 hrs. 4,000 hrs. 7,200 hrs. 16,000 hrs. 12,600 hrs.
Total (800 units × 5h) (800 units × 9h) (800 units ×20h) (1,400×9h)
P Q R Q (Balance)
Income Statement
Product No of Units Contribution/unit Total Cont.
(`) (`)
P 800 5 4,000
Q 800+1,400 18 39,600
R 800 30 24,000
Total Contribution 67,600
Less: Fixed Overheads 30,000
Net Profit 37,600
(b) Dealer Profitability Statement
Particulars D1 D2 D3 D4
Sales (units) 2,000 3,000 5,000 4,000
(`) (`) (`) (`)
Sales Revenue …(A) 4,00,000 6,00,000 10,00,000 8,00,000
Less: Cost of Production 2,40,000 3,60,000 6,00,000 4,80,000
@60% (B)
Contribution …(A) - (B) 1,60,000 2,40,000 4,00,000 3,20,000
Less: Additional
Overheads
Delivery Cost 315 600 540 1,800
(No. of K.M. × ` 3) {(2,000/250)-1} (3,000/300) {(5,000/250) -2} (4,000/200)
×15 × `3 × 20 × `3 × 10 × `3 × 30 × `3
Speed Delivery Cost 75 --- 100 ---
No. of Emergency (1x15) × `5 (2x10) × `5
Delivery ×`5)
Order Processing Cost 200 500 1,000 500
(No. of Orders × ` 50) (2,000/500) (3,000/300) (5,000/250) (4,000/400)
× `50 × `50 × `50 × `50
Sales Visit Cost 16,000 6,000 20,000 4,000
(No. of Visits × `2,000) (8 × `2,000) (3 × `2,000) (10 × `2,000) (2 × `2,000)

Product Handling Cost 400 600 1,000 800
(No. of units × ` 0.20) (2,000 × `0.20) (3,000 × `0.20) (5,000 × ` 0.20) (4,000 × `0.20)
Warranty Complaint --- 48,000 --- 54,000
(No. of complaints × (8 × ` 6,000) (9 × ` 6,000)
`6,000)
Profit per dealer 1,43,010 1,84,300 3,77,360 2,58,900
Profit per dealer (%) 35.75% 30.72% 37.74% 32.36%
Rank II IV I III
Analysis
The contribution margin is 40% for each dealer but when the other overheads costs per
dealer is included in the above Profitability Statement the profitability of the three dealers
become different. D3 is the most profitable dealer.
Question 7
Answer any four out of the following five questions :
(a) Classify the following under category of cost control or cost reduction:
(i) Cost exceeding budgets or standards is investigated.
(ii) Preventive Function
(iii) Corrective Function
(iv) Measures to standardize for increasing productivity.
(v) Provision for proper storage facilities for materials.
(vi) Continuous comparison of actual with the standard set.
(vii) Challenges the standard.
(viii) Value analysis
(b) Brief the principles associated with synchronous manufacturing.
(c) State whether the following statements are True or False in the context of PERT/CPM:
(i) A delay in the completion of critical activities need not cause a delay in the completion
of the whole project.
(ii) Total float is the aggregate of the free, interfering and independent floats.
(iii) The optimal duration of a project is the minimum time in which it can be completed.
(iv) Activity which is not connected to any of the intermediate events or end event is
called dangling activity.
(d) Classify the following measures under appropriate categories in a Balanced scorecard for
a banking company which excels in its home loan products:
(i) A new product related to life insurance is being considered for a tie up with the
successful housing loan disbursements, e.g. Every housing loan applicant to be
advised to take life policy or compelled to take fire insurance policy.
(ii) How different sectors of housing loans with different interest rates have been
sanctioned, their volumes of growth in the past 4 quarters?
(iii) How many days are taken to service a loan, how many loans have taken longer, what
additionally loans are to be released soon, etc.?
(iv) After sanctioning of the loan taking feedback from the customers about the time,
behaviour of staff and suggestion for improvement of the product.
(e) Fill the extra variable and co-efficient of extra variable in following types of constraint in
linear programming problems:
Types of Constraint Extra variable Co-efficient of extra variables in the
required Objective function
Max-Z Min-Z
Less than or equal to (≤)
Greater than or equals to (≥)
Equal to (=)
(4 x 4 = 16 Marks)
Answer
(a) (i) Cost Control
(ii) Cost Control
(iii) Cost Reduction
(iv) Cost Reduction
(v) Cost Control
(vi) Cost Control
(vii) Cost Reduction
(viii) Cost Reduction
(b) It is an all encompassing manufacturing management philosophy which includes a set of
principles, procedures, and techniques where every action is evaluated in terms of
common goals of the organization.
The seven principles are:
(i) Focus on synchronizing the production flow than on idle capacities.

(ii) Value of time at a bottleneck resource is equal to the throughput rate of products
processed by the bottle neck.
(iii) Value of time at a non- bottleneck resource is negligible.
(iv) Level of utilization of a non- bottleneck resource is controlled by other constraints
within the system.
(v) Resources must be utilized, not simply activated.
(vi) Transfer batch should not be equal to the process batch.
(vii) A process batch should be variable both along its route and overtime.
(c) (i) False
(ii) False
(iii) False
(iv) True
(d) (i) New Product tie up --- Innovation /Learning Perspective
(ii) Growth of Volume --- Financial Perspective
(iii) Time for Loan / Fresh Products --- Customer Perspective
(iv) Suggestions for Improvements --- Internal Perspective
(e)
Types of Extra Variable Required Coefficients of Extra
Constraint Variables in the Objective
Function
Max Z Min Z
Less than or A Slack Variable is to be added
0 0
equal to (≤)
Greater than A Surplus Variable is to be subtracted 0 0
or equal to and
-M +M
(≥) An Artificial Variable is to be added.
Equal to (=) Only an artificial variable is to be added -M +M
PAPER – 6: INFORMATION SYSTEMS CONTROL AND AUDIT
Question No. 1 is compulsory.
Candidates are required to answer any four questions
from the remaining five questions.
Question 1
ABC Limited is a marketing company having multiple branches across India. The company is
planning to expand its business by opening new branches in India as well as in abroad. With
such expansion of business and related activities thereon, the company wants to ensure
Information Technology compliance with the help of implementation of COBIT 5. The company
has invited proposals from various vendors for the purchase of hardware and software to support
the proposed expansion. The Board of Directors wants to follow the best practices in areas of
Governance, which are adopted across the industry, in the activities of the company.
You are appointed as a consultant in the company. Please answer the following queries raised
by the management of ABC Limited.
(a) What are the various methods to validate the vendor's proposal received in respect of the
hardware and software purchase? (6 Marks)
(b) As the consultant of the company, you are asked to explain the major benefits of
Governance to the Board of Directors. (5 Marks)
(c) COBIT 5 provides key management practices for ensuring compliance with external
compliance as relevant to the enterprise. Explain the key management practices to help
the management of the company to ensure IT compliance. (3 Marks)
Answer
(a) Some of the methods to validate the vendor’s proposal received in respect of the hardware
and software purchase are as follows:
• Checklists: It is the simplest and a subjective method for validation and evaluation.
The various criteria are put in check list in the form of suitable questions against which
the responses of the various vendors are validated. For example - Support Service
Checklists may have parameters like Performance; System development,
Maintenance, Conversion, Training, Back-up, Proximity, Hardware and Software.
• Point-Scoring Analysis: Point-scoring analysis provides an objective means of
selecting a final system. There are no absolute rules in the selection process, only
guidelines for matching user needs with software capabilities. Thus, even for a small
business, the evaluators must consider such issues as the company’s data
processing needs, its in-house computer skills, vendor reputations, software costs,
and so forth.
• Public Evaluation Reports: Several consultancies as well as independent agencies
compare the hardware and software performance for various manufacturers and
publish their reports in this regard. This method has been frequently and usefully
employed by several buyers in the past. For those criteria, however, where published
reports are not available, reports would have to be made to other methods of
validation. This method is particularly useful where the buying staff has inadequate
knowledge of facts.
• Benchmarking problems related Vendor’s Solutions: Benchmarking problems
related to vendors’ proposals are accomplished by sample programs that represent
at least a part of the buyer’s primary work load and include considerations and can
be current applications that have been designed to represent planned processing
needs. That is, benchmarking problems are oriented towards testing whether a
solution offered by the vendor meets the requirements of the job on hand of the buyer.
• Testing Problems: Test problems disregard the actual job mix and are devised to
test the true capabilities of the hardware, software or system. For example, test
problems may be developed to evaluate the time required to translate the source code
into the object code, response time for two or more jobs in multi-programming
environment, overhead requirements of the operating system in executing a user
program, length of time required to execute an instruction, etc. The results, achieved
by the machine can be compared and price performance judgment can be made. It
must be borne in mind, however that various capabilities to be tested would have to
be assigned relative weight-age.
(b) Major benefits of Governance can be summarized as follows:
• Achieving enterprise objectives by ensuring that each element of the mission and
strategy are assigned and managed with a clearly understood and transparent
decisions rights and accountability framework;
• Defining and encouraging desirable behavior in the use of IT and in the execution of
IT outsourcing arrangements;
• Implementing and integrating the desired business processes into the enterprise;
• Providing stability and overcoming the limitations of organizational structure;
• Improving customer, business and internal relationships and satisfaction, and
reducing internal territorial strife by formally integrating the customers, business units,
and external IT providers into a holistic IT governance framework; and
• Enabling effective and strategically aligned decision making for the IT Principles that
define the role of IT, IT Architecture, IT Infrastructure, Application Portfolio and
Frameworks, Service Portfolio, Information and Competency Portfolios and IT
Investment and Prioritization.
PAPER – 6: INFORMATION SYSTEMS CONTROL AND AUDIT 31
(c) The key management practices provided by COBIT 5 to help the management of the
company to ensure IT compliance are as follows:
• Identify External Compliance Requirements: On a continuous basis, identify and
monitor for changes in local and international laws, regulations, and other external
requirements that must be complied with, from an IT perspective.
• Optimize Response to External Requirements: Review and adjust policies,
principles, standards, procedures and methodologies to ensure that legal, regulatory
and contractual requirements are addressed and communicated. Consider industry
standards, codes of good practice, and best practice guidance for adoption and
adaptation.
• Confirm External Compliance: Confirm compliance of policies, principles,
standards, procedures and methodologies with legal, regulatory and contractual
requirements.
• Obtain Assurance of External Compliance: Obtain and report assurance of
compliance and adherence with policies, principles, standards, procedures and
methodologies. Confirm that corrective actions to address compliance gaps are
closed in a timely manner.
Question 2
(a) In order to cope up with the new technology usage in an enterprise, the auditor shall be
competent to provide independent evaluation as to whether the business process activities
are recorded and reported according to established standards or criteria. In light of this,
discuss the issues involved in the performance of evidence collection and understanding
the reliability of controls. (6 Marks)
(b) The intuitive character of executive decision-making is reflected strongly in the types of
information found most useful to executives. Briefly explain the characteristics of the types
of information used in executive decision-making. (5 Marks)
(c) Continuous auditing enables auditors to shift their focus from the traditional "transaction"
audit to the "system and operations" audit. List any three ‘disadvantages and limitations’
of the use of continuous audit techniques. (3 Marks)
Answer
(a) The performance of evidence collection and understanding the reliability of controls
involves issues like-
• Data retention and storage: A client’s storage capabilities may restrict the amount
of historical data that can be retained on-line and readily accessible to the auditor. If
the client has insufficient data retention capacities, the auditor may not be able to
review a whole reporting period transactions on the computer system. For example,
the client’s computer system may save data on detachable storage device by
summarising transactions into monthly, weekly or period end balances.

• Absence of input documents: Transaction data may be entered into the computer
directly without the presence of supporting documentation e.g. input of telephone
orders into a telesales system. The increasing use of Electronic Data Interchange
(EDI) will result in less paperwork being available for audit examination.
• Non-availability of audit trail: The audit trails in some computer systems may exist
for only a short period of time. The absence of an audit trail will make the auditor’s
job very difficult and may call for an audit approach which involves auditing around
the computer system by seeking other sources of evidence to provide assurance that
the computer input has been correctly processed and output.
• Lack of availability of printed output: The results of transaction processing may
not produce a hard copy form of output, i.e. a printed record. In the absence of
physical output, it may be necessary for an auditor to directly access the electronic
data retained on the client’s computer. This is normally achieved by having the client
provide a computer terminal and being granted “read” access to the required data
files.
• Audit evidence: Certain transactions may be generated automatically by the
computer system. For example, a fixed asset system may automatically calculate
depreciation on assets at the end of each calendar month. The depreciation charge
may be automatically transferred (journalised) from the fixed assets register to the
depreciation account and hence to the client’s income and expenditure account.
• Legal issues: The use of computers to carry out trading activities is also increasing.
More organisations in both the public and private sector intend to make use of EDI
and electronic trading over the Internet. This can create problems with contracts, e.g.
when is the contract made, where is it made in terms of its legal jurisdiction, what are
the terms of the contract and which are the parties to the contract. Furthermore, the
laws regarding the admissibility of computer evidence varies from one country to
another and from one court to another.
(b) The characteristics of the types of information used in executive decision-making are as
follows:
• Lack of structure: Many of the decisions made by executives are relatively
unstructured. These types of decisions are not as clear-cut as deciding how to debug
a computer program or how to deal with an overdue account balance. Also, the
questions like ‘which data are required’ or ‘how to weigh available data when reaching
a decision’ are generally not always obvious.
• High degree of uncertainty: Executives work in a decision space that is often
characterized by a lack of precedent. For example, when the Arab oil embargo hit in
mid 1970s, no such previous event could be referenced for advice. Executives also
work in a decision space where results are not scientifically predictable from actions.
If prices are lowered, for instance, product demand will not automatically increase.
• Future orientation: Strategic-planning decisions are made to shape future events.
As conditions change, enterprises must change also. It is the executive’s
responsibility to make sure that the organization keeps pointed toward the future.
Some key questions about the future external environment include: “How will future
technologies affect what the company is currently doing? What will the competition
(or the government) do next? What products will consumers demand five years from now?”
• Informal Source: Executives, more than other types of managers, rely heavily on
informal source for key information. For example, lunch with a colleague in another
firm might reveal some important competitor strategies. Informal sources such as
television might also feature news of momentous concern to the executive – news
that he or she would probably never encounter in the company’s database or in
scheduled computer reports.
• Low level of detail: Most important executive decisions are made by observing broad
trends. This requires the executive to be more aware of the large overview than the
tiny items. Even so, many executives insist that the answers to some questions can
only be found by mucking through details.
(c) Following are some of the disadvantages and limitations of the use of the continuous audit
system:
• Auditors should be able to obtain resources required from the organization to support
development, implementation, operation, and maintenance of continuous audit
techniques.
• Continuous audit techniques are more likely to be used if auditors are involved in the
development work associated with a new application system.
• Auditors need the knowledge and experience of working with computer systems to be
able to use continuous audit techniques effectively and efficiently.
• Continuous auditing techniques are more likely to be used where the audit trail is less
visible and the costs of errors and irregularities are high.
• Continuous audit techniques are unlikely to be effective unless they are implemented
in an application system that is relatively stable.
Question 3
(a) You are appointed as consultant in an organization for its program development and
implementation. The management has requested you to briefly describe the various
phases of Program Development Life Cycle. (6 Marks)
(b) Explain the Tactical Layer of Application Security Layer and the audit issues relating to the
tactical layer with respect to the application security control auditing. (5 Marks)
(c) Define the following terms with reference to Information Technology Act.
(i) Electronic Form

(ii) Information
(iii) Key Pair (3 Marks)
Answer
(a) The primary objective of Program Development Life Cycle phase within the Systems
Development Life Cycle is to produce or acquire and to implement high-quality programs.
This includes the following phases:
• Planning: Techniques like Work Breakdown Structures (WBS), Gantt charts and
PERT (Program Evaluation and Review Technique) Charts can be used to monitor
progress against plan.
• Control: The Control phase has two major purposes:
o Task progress in various software life-cycle phases should be monitored against
plan and corrective action should be taken in case of any deviations.
o Control over software development, acquisition, and implementation tasks
should be exercised to ensure that the software released for production use is
authentic, accurate, and complete.
• Design: A systematic approach to program design, such as any of the structured
design approaches or object-oriented design is adopted.
• Coding: Programmers must choose a module implementation and integration
strategy like Top-down, Bottom-up and Threads approach; a coding strategy that
follows the percepts of structured programming, and a documentation strategy to
ensure program code is easily readable and understandable.
• Testing: These tests are to ensure that a developed or acquired program achieves
its specified requirements. These are as follows:
o Unit Testing – which focuses on individual program modules;
o Integration Testing – Which focuses in groups of program modules; and
o Whole-of-Program Testing – which focuses on whole program.
• Operation and Maintenance: Management establishes formal mechanisms to
monitor the status of operational programs so maintenance needs can be identified
on a timely basis. Three types of maintenance can be used are as follows:
o Repair Maintenance: in which program errors are corrected;
o Adaptive Maintenance: in which the program is modified to meet changing user
requirements; and
o Perfective Maintenance: in which the program is tuned to decrease the
resource consumption.
(b) Tactical Layer of the Application Security Layer: Also, known as Management Layer, it
is the second layer in application security that includes supporting functions such as
security administration, IT risk management and patch management.
Various audit issues relating to the Tactical Layer are related to security administration
that includes -
• Timely updates to user profiles, like creating/deleting and changing of user accounts.
Auditor needs to check that any change to user rights is a formal process including
approval from manager of the employee.
• IT Risk Management: An auditor should understand the risk associated with each
application and obtain a report on periodic risk assessment on the application or self-
assessment/ compliance reports on the application. This includes the following
activities:
o Assessing risk over key application controls;
o Conducting a regular security awareness programme on application user;
o Enabling application users to perform a self-assessment/complete compliance
checklist questionnaire to gauge the users’ understanding about application
security;
o Reviewing application patches before deployment and regularly monitoring
critical application logs;
o Monitoring peripheral security in terms of updating antivirus software.
• Interface Security: This relates to application interfaced with another application in
an organization. An auditor needs to understand that data flow to and from the
application. Security of the interfaced data is also important, especially when
unencrypted methods of transmission are used for data transmission.
• Audit Logging and Monitoring: Regular monitoring the audit logs is required. The
same is not possible for all transactions, so must be done on an exception reporting
basis.
(c) The definition of the following terms with reference to Information Technology Act is as
follows:
(i) "Electronic Form" with reference to information means any information generated,
sent, received or stored in media, magnetic, optical, computer memory, micro film,
computer generated micro fiche or similar device.
(ii) "Information" includes data, message, text, images, sound, voice, codes, computer
programmes, software and databases or micro film or computer generated micro
fiche.
(iii) "Key Pair", in an asymmetric crypto system, means a private key and its
mathematically related public key, which are so related that the public key can verify
a digital signature created by the private key.

Question 4
(a) Explain the characteristics of Software as a Service In cloud computing. (6 Marks)
(b) Discuss various levels of classification of information in an organization. (5 Marks)
(c) PQR Insurance Company Limited is providing insurance services to Indian citizens. What
are the requirements of IRDA for System Audit in respect of this company? (3 Marks)
Answer
(a) Characteristics of Software as a Service (SaaS) are as follows:
• One-to-Many: SaaS services are delivered as one-to-many models where a single
instance of the application can be shared by multiple customers.
• Web Access: SaaS services allow the end users to access the application from any
location of the device if connected to the Internet.
• Centralized Management: Since SaaS services are hosted and managed from the
central location, the SaaS providers perform the automatic updates to ensure that
each customer is accessing the most recent version of the application without any
user-side updates.
• Multi-device Support: SaaS services can be accessed from any end user devices
such as desktops, laptops, tablets, smartphones, and thin clients.
• Better Scalability: Most of the SaaS services leverage Platform as a Service (PaaS)
and Infrastructure as a Service (IaaS) for its development and deployment and ensure
a better scalability than traditional software.
• High Availability: SaaS services ensure 99.99% availability of user data as proper
backup and recovery mechanisms are implemented.
• Application Program Interface (API) Integration: SaaS services have the capability
of integrating with other software or service through standard APIs.
(b) Classification of Information are as follows:
• Top Secret: Highly sensitive internal information e.g. pending mergers or
acquisitions; investment strategies; plans or designs; that could seriously damage the
organization if such information were lost or made public. Information classified as
Top Secret information has very restricted distribution and must be protected at all
times. Security at this level should be the highest possible.
• Highly Confidential: Information that, if made public or even shared around the
organization, could seriously impede the organization’s operations and is considered
critical to its ongoing operations. Information would include accounting information,
business plans, sensitive customer information of banks, solicitors and accountants
etc., patient's medical records and similar highly sensitive data. Such information
should not be copied or removed from the organization’s operational control without
specific authority. Security at this level should be very high.
• Proprietary: Information of a proprietary nature; procedures, operational work
routines, project plans, designs and specifications that define the way in which the
organization operates. Such information is normally for proprietary use to authorized
personnel only. Security at this level should be high.
• Internal Use only: Information not approved for general circulation outside the
organization where its loss would inconvenience the organization or management but
where disclosure is unlikely to result in financial loss or serious damage to credibility.
Examples would include, internal memos, minutes of meetings, internal project
reports. Security at this level should controlled but normal.
• Public Documents: Information in the public domain; annual reports, press
statements etc.; which has been approved for public use. Security at this level should
minimal.
(c) The requirements of Insurance Regulatory and Development Authority of India (IRDA) for
System Audit in respect of PQR Insurance Company Ltd are as follows:
• All insurers shall have their systems and process audited at least once in three years
by a CA firm.
• In doing so, the current internal or concurrent or statutory auditor is not eligible for
appointment.
• CA firm must be having a minimum of 3-4 years’ experience of IT systems of banks
or mutual funds or insurance companies.
Question 5
(a) Briefly explain the components of BCM process. (6 Marks)
(b) You are appointed to audit the Information Systems of XYZ Limited. Please enlighten the
management about various categories of Information Systems Audits. (5 Marks)
(c) Write a short note on Business Intelligence. (3 Marks)
Answer
(a) The components of Business Continuity Management (BCM) Process are as follows:
• BCM – Process: The management process enables the business continuity, capacity
and capability to be established and maintained. The capacity and capability are
established in accordance to the requirements of the enterprise.
• BCM – Information Collection Process: The activities of assessment process do
the prioritization of an enterprise’s products and services and the urgency of the
activities that are required to deliver them. This sets the requirements that will
determine the selection of appropriate BCM strategies in the next process.

• BCM – Strategy Process: Finalization of business continuity strategy requires
assessment of a range of strategies. This requires an appropriate response to be
selected at an acceptable level and during and after a disruption within an acceptable
timeframe for each product or service, so that the enterprise continues to provide
those products and services. The selection of strategy will consider the processes
and technology already present within the enterprise.
• BCM – Development and Implementation Process: Development of a management
framework and a structure of incident management, business continuity and business
recovery and restoration plans.
• BCM – Testing and Maintenance Process: BCM testing, maintenance and audit
testify the enterprise BCM to prove the extent to which its strategies and plans are
complete, current and accurate; and Identifies opportunities for improvement.
• BCM – Training Process: Extensive trainings in BCM framework, incident
management, business continuity and business recovery and restoration plans
enable it to become part of the enterprise’s core values and provide confidence in all
stakeholders in the ability of the enterprise to cope with minimum disruptions and loss
of service.
(b) Information Systems Audit has been categorized into five types:
(i) Systems and Application: An audit to verify that systems and applications are
appropriate, are efficient, and are adequately controlled to ensure valid, reliable,
timely, and secure input, processing, and output at all levels of a system's activity.
(ii) Information Processing Facilities: An audit to verify that the processing facility is
controlled to ensure timely, accurate, and efficient processing of applications under
normal and potentially disruptive conditions.
(iii) Systems Development: An audit to verify that the systems under development meet
the objectives of the organization and to ensure that the systems are developed in
accordance with generally accepted standards for systems development.
(iv) Management of IT and Enterprise Architecture: An audit to verify that IT
management has developed an organizational structure and procedures to ensure a
controlled and efficient environment for information processing.
(v) Telecommunications, Intranets, and Extranets: An audit to verify that controls are
in place on the client (end-point device), server, and on the network connecting the
clients and servers.
(c) Business Intelligence (BI) refers to applications and technologies that are used to collect
and provide access and analyze data and information about company’s operations. A
complete Business Intelligence provides consistent and standard information essential in
enterprise operations and consists of range of tools. Some BI applications are used to
analyze performance or internal operations e.g. EIS (Executive Information System),

business planning, finance and budgeting tools. Some BI applications are used to store
and analyze data, for example - Data mining, Data Warehouses, Decision Support System
etc. Some BI applications are also used to analyze or manage the human resources e.g.
customer relationship and marketing tools.
Question 6
(a) Explain the sections contained in a well-documented Systems Requirement Specifications
(SRS). (6 Marks)
(b) In the present day, the enterprises not only need to protect there IS assets against cyber-
attack but also need to take steps to ensure compliance with cyber laws as well. What are
the key steps for ensuring such compliance? (5 Marks)
(c) Write a short note on the Audit of Quality Assurance Management Controls. (3 Marks)
OR
Write any three major strengths of Agile Model of Software Development. (3 Marks)
Answer
(a) A well-documented Systems Requirement Specification (SRS) may normally contain the
following sections:
• Introduction: Goals, Objectives, software context, Scope and Environment of the
computer-based system.
• Information Description: Problem description; Information content, flow and
structure; Hardware, software, human interfaces for external system elements and
internal software functions.
• Functional Description: Diagrammatic representation of functions; processing
narrative for each function; Interplay among functions; Design constraints.
• Behavioral Description: Response to external events and internal controls.
• Validation Criteria: Classes of tests to be performed to validate functions,
performance and constraints.
• Appendices: Data flow/Object Diagrams; Tabular Data; Detailed description of
algorithms charts, graphs and other such material.
• SRS Review: The development team makes a presentation and then hands over the
SRS document to be reviewed by the user or customer. The review reflects the
development team’s understanding of the existing processes. Only, after ensuring
that the document represents existing processes accurately, the user should sign the
document. This is a technical requirement of the contract between users and
development team/organization.
(b) Enterprises not only need to protect their Assets against cyber-attack but also need to take
steps to ensure compliance with cyber laws as well. Some key steps for ensuring such
compliance are given below:
• Designate a Cyber Law Compliance Officer as required.
• Conduct regular training of relevant employees on Cyber Law Compliance.
• Implement strict procedures in HR policy for non-compliance.
• Implement authentication procedures as suggested in law.
• Implement policy and procedures for data retention as suggested.
• Identify and initiate safeguard requirements as applicable under various provisions of
the Act such as: Sections 43A, 69, 69A, 69B, etc.
• Implement applicable standards of data privacy on collection, retention, access,
deletion etc.
• Implement reporting mechanism for compliance with cyber laws.
(c) Audit of Quality Assurance Management Controls is as follows:
• Auditors might use interviews, observations and reviews of documentation to evaluate
how well Quality Assurance (QA) personnel perform their monitoring role.
• Auditors might evaluate how well QA personnel make recommendations for improved
standards or processes through interviews, observations, and reviews of
documentation.
• Auditors can evaluate how well QA personnel undertake the reporting function and
training through interviews, observations, and reviews of documentation.
Or
Some of the strengths of Agile Model of Software Development as identified by experts
and practitioners include the following:
• Agile methodology has the concept of an adaptive team, which enables to respond to
the changing requirements.
• The team does not have to invest time and efforts and finally find that by the time they
delivered the product, the requirement of the customer has changed.
• Face to face communication and continuous inputs from customer representative
leaves a little space for guesswork.
• The documentation is crisp and to the point to save time.
• The end result is generally the high-quality software in least possible time duration
and satisfied customer.
PAPER – 7: DIRECT TAX LAWS
PART II
Question No.1 is compulsory.
Answer any four questions from the remaining five questions.
Working notes should form part of the respective answers.
All questions relate to Assessment Year 2019-20, unless stated otherwise in the question.
Question 1
On, 1.4.2018, Binu Ltd. of Delhi, a domestic company, engaged in the business of
manufacturing of metro rail seats, converted into an LLP by name M/s. Soumya LLP fulfilling
all the conditions specified in section 47(xiiib) of the Income-tax Act, 1961. Some of the
relevant information is given below in respect of Binu Ltd., as on 31.3.2018:
(a) Voluntary Retirement Scheme (VRS) expenditure incurred by the company during the PY
2016-17 is ` 20 lakhs. The company was allowed deduction of ` 4 lakhs each for the
PYs 2016-17 & 2017-18 under section 35DDA.
(b) 150 equity shares in Toyo Ltd., an Indian company listed in Bombay Stock Exchange was
acquired for ` 1,900 per share on 31.7.2016. On conversion, these share become the
property of M/s. Soumya LLP.
(c) Besides other assets transferred to M/s. Soumya LLP by M/s. Binu Ltd., it also
transferred two factory buildings. On 1.4.2018, M/s. Soumya LLP leased out one factory
building along with plant and machineries and furniture etc. at a consolidated lease rent
of ` 50,000 per month.
During the previous year 2018-19, the M/s. Soumya LLP earned a profit of ` 25,40,000 after
debit/credit of the following items to its Profit and loss account:
(i) Mr. Binu is the working partner of the LLP. He is also a working partner in another firm.
He is actively engaged in the business of both the firms. Binu gets, a salary of ` 55,000
p.m. from M/s. Soumya LLP and the same is authorised in the deed of LLP.
(ii) Mr. Ayushman, an employee, was deputed to work in the client's office in Mumbai for
three months. The LLP has paid his salary in cash for the months when he was in
Mumbai, amounting to ` 3,45,000 (net of TDS and other deductions), since he did not
have a bank· account in Mumbai. This payment was included in amount of "salary"
debited to profit and loss account. Mr. Ayushman is normally posted in Delhi being the
headquarter of M/s. Soumya LLP.
The Suggested Answers for Paper 7: Direct Tax Laws are based on the provisions of Income-
tax Law as amended by the Finance Act, 2018. For May, 2019 examination, the relevant
assessment year is A.Y.2019-20.
(iii) Amount of ` 25,000 was paid towards penalty for non-fulfilment of delivery conditions of
a contract for sale for the reasons beyond its control.
(iv) The LLP had provided an amount of ` 18 lakhs being the sum estimated as payable to
workers based on agreement to be entered with workers union towards periodical wage
revision once in 3 years. The provision, is based on a fair estimation of wage and
reasonable certainty of revision once in 3 years.
(v) Depreciation debited to profit and loss account ` 5,40,000.
(vi) Gratuity provisions based on actuarial valuations ` 6.5 lakhs. (Gratuity actually paid ` 4
lakhs to retired employees debited in Gratuity provision account).
(vii) Profit on sale of shares of M/s. Toyo Ltd. ` 1,27,500. These shares were sold on
31.5.2018 for ` 2,750 per share. The highest price of Toyo Ltd. quoted on the stock
exchange as on 31.1.2018 was ` 2,500 per share.
(viii) Repairs to plant and machinery include ` 59,000 in respect of plant and machinery given
on lease.
(ix) Factory licence fee paid ` 15,000 for each factory building.
(x) Legal fee includes ` 26,000 paid to an advocate for drafting and registering the lease
agreement.
Additional Information:
(1) Under an agreement of debt restructuring, the bank has converted unpaid interest
amounting to ` 9,00,000 up to 31.7.2018 into a new loan account repayable in 3 equal
annual instalments. The first instalment was paid in March 2019 by debiting the new loan
account.
(2) Mr. Binu, being a working partner, bought a car which is registered in his own name out
of the funds of LLP. The car was used exclusively for the purposes of the business of the
LLP only. The depreciation on the car amounts to ` 15,000 for the PY 2018-19 which is
not included in the depreciation amount debited to profit and loss account.
(3) Depreciation as per Income-tax Rules ` 8,10,000 (including depreciation on the assets
given on lease amounting to ` 90,000). It does not include depreciation on car.
(4) The LLP sold import entitlements on 1.5.2018 for ` 1,50,000.
This sum is not included in profit and loss account by treating it as capital receipt.
You are required to discuss the implication of such conversion and calculate the total income
in the hands of M/s Soumya LLP for the Assessment Year 2019-20. (14 Marks)
Answer
Implication on conversion of company into LLP
Transfer of capital asset or intangible asset by a private company or unlisted public company
to a LLP or any transfer of share held by shareholder to LLP in a conversion of private
PAPER – 7 : DIRECT TAX LAWS 43
company into an LLP is not regarded as transfer under section 47 provided the conditions
specified therein are satisfied.
Accordingly, transfer of capital asset by Binu Ltd 1., Delhi to M/s Soumya LLP is not regarded
as transfer since the conditions specified in section 47(xiiib) as stated in the question stand
satisfied and fulfilled.
Computation of Total Income in the hands of M/s Soumya LLP for the A.Y. 2019-20
I Profits and gains of business and
profession
Net profit as per the profit and loss account 25,40,000
Add: Items debited but to be considered
separately or to be disallowed
(i) Salary to Binu, working partner (to be 6,60,000
considered separately) [` 55,000 x 12]
(ii) Salary paid to Mr. Ayushman, an -
employee
[Under section 40A(3), disallowance is
attracted in respect of expenditure for
which cash payment exceeding
` 10,000 is made on a day to a person.
Payment of ` 3,45,000 to Mr. Ayushman,
an employee, is covered by exception
under Rule 6DD since, TDS has been
deducted, employee is temporarily posted
in Mumbai and does not have a bank
account in Mumbai. Since the same has
been debited to profit and loss account,
no adjustment is required]
(iii) Penalty for non-fulfilment of delivery -
conditions of a contract for sale
[Penalty for non-fulfilment of delivery
conditions of a contract for sale is not on
account of infraction of law. Penalty for
breach of contract is business or
commercial loss and would be allowable
1 Considering the fact given in the question that all conditions of section 47(xiiib) have been fulfilled, it is
assumed that Binu Ltd. is an unlisted company.
expenditure under section 37. Since the

same has been debited to profit and loss
account, no adjustment is required]
(iv) Provision for wages payable to -
workers
[The provision is based on fair estimate of
wages and reasonable certainty of
revision, and thus is allowable as
deduction, as ICDS-X requires
‘reasonable certainty for recognition of a
provision, which is present in this case.
As the provision has been debited to
profit and loss account, no adjustment is
required while computing business
income]
(v) Depreciation as per books of account 5,40,000
(vi) Provision for gratuity 2,50,000
[Provision of ` 6,50,000 for gratuity based
on actuarial valuation is not allowable as
deduction as per section 40A(7).
However, actual gratuity of
` 4,00,000 paid is allowable as
deduction. Hence, the difference is to be
added back being of ` 2,50,000
(` 6,50,000 – ` 4,00,000)]
(viii) Repair to plant and machinery given 59,000
on lease
[Lease rent from factory building along
with plant and machinery and furniture is
chargeable to tax under the head income
from other sources, since the main
business of the M/s Soumya LLP is
manufacturing of metro rail seats and not
letting out the properties. Therefore,
repairs to such plant and machinery to be
deducted from lease income taxable
under the head “Income from Other
Sources. Since the same has been
debited to profit and loss account, it has
to be added back]
(ix) Factory licence fee paid 15,000
[Factory licence fee in respect of leased

out factory building is to be deducted from
lease income taxable under the head
“Income from Other Sources”. Since the
same has been debited to profit and loss
account, it has to be added back]
(x) Legal fee to advocate for drafting and 26,000
registering lease agreement
[Legal fee to advocate for drafting and
registering lease agreement to be
deducted from lease income taxable 15,50,000
under the head “Income from Other
Sources”. Since the same has been
debited to profit and loss, it has to be
added back]
40,90,000
Add: Amount taxable but not credited to
profit and loss account
AI(4) Profit on sale of import entitlements 1,50,000
[Profit on sale of import entitlements is
chargeable to tax under the head “Profits
and gains from business and profession”
under section 28. Since the same has not
been credited to profit and loss account,
it has to be added]
42,40,000
Less: Items credited to profit and loss
account, but not includible in
business income / permissible
expenditure and allowances
(i) Profit on sale of shares of M/s Toyo 1,27,500
Ltd.
[Taxable under the head “Capital Gains”.
Since the same has been credited to
profit and loss account, it has to be
reduced from business income]
AI(a)Voluntary Retirement Scheme 4,00,000
expenditure [` 20 lakh/5]
[One fifth deduction is available in respect
of payment for voluntary retirement

scheme for five years. Where a private
company or unlisted company is
succeeded by a LLP fulfilling the
conditions laid down in section 47(xiiib),
then, deduction in respect of voluntary
retirement scheme is available to the LLP
for the balance years from the year of
succession. Hence, deduction of
` 4,00,000 is allowable in P.Y. 2018-19 to
M/s Soumya LLP being for 3rd year]
AI(1) Interest paid during the year 3,00,000
[Conversion of unpaid interest into loan
shall not be construed as payment of
interest for the purpose of section 43B.
The amount of unpaid interest converted
into a new loan will be allowable as
deduction only in the year in which such
converted loan is actually paid. Since ` 3
lakhs has been paid in the P.Y. 2018-19,
the same is allowable as deduction]
AI(2) Depreciation on motor car exclusively 15,000
used for business purpose
[Depreciation on motor car bought and used
exclusively for the purposes of business is
allowable though not registered in the name
of the firm. 2]
AI(3) Depreciation as per Income-tax Rules 7,20,000
[` 8,10,000 – ` 90,000]
[Depreciation on leased out asset to be
deducted from lease income taxable under
the head “Income from Other Sources. Since
15,62,500
the same has been included in depreciation
of ` 8,10,000, it has to be reduced from it]
Book Profit 26,77,500
Less: Remuneration to Mr. Binu, a working
partner [Subject to limit specified in
section 40(b)
2 Mysore Minerals Ltd. v. CIT (1999) 239 ITR 775 (SC).

[On first ` 3,00,000 of book profit, 90% of 6,60,000

book profit or ` 1,50,000, whichever is
higher and on the balance of book profit,
60% of balance book profit] [` 16,96,500
(2,70,000, being 90% of ` 3,00,000 +
`14,26,500, being 60% of ` 23,77,500)
restricted to actual remuneration paid to
Binu. 3
Profits and gains from business and 20,17,500
profession
II Capital Gains
Sale consideration [150 x ` 2,750 per share] 4,12,500
Less: Cost of acquisition [150 x ` 2,500 per 3,75,000
share] [Indexation benefit would not be
available]
[Higher of
(i) ` 1,900, actual cost, being the cost of
acquisition to Binu Ltd. as per section 49]
(ii) ` 2,500, being the lower of
- Fair market value as on 31.1.2018
[` 2,500 per share]
- Full value of consideration [` 2,750
per share]
Long term Capital gains since shares held for 37,500
more than 12 months [Period of holding of Binu
Ltd. is also included]
III Income from Other Sources
Lease rent [` 50,000 x 12] 6,00,000
Less: Deduction under section 57
Repair of leased out plant and 59,000
machinery
Factory licence fee in respect of leased 15,000
out factory building
Legal fee for drafting and registering 26,000
lease agreement
3It is assumed that Mr. Binu is the only working partner to whom remuneration is authorised by the
partnership deed.
Depreciation of assets given on lease 90,000

4,10,000
Gross Total Income/ Total Income 24,65,000
Question2
(a) On 1.4.2018, Wuyu Ltd. was amalgamated with Rayu Ltd. satisfying all the conditions
mentioned in section 2(1B).
Wuyu Ltd. had the following brought forward losses as assessed till the assessment year
2018-19:
Particulars ` in lakhs
Speculation business loss 5
Unabsorbed Depreciation 13
Business loss 150
Unabsorbed expenditure of capital nature on
scientific research 3
Rayu Ltd. has computed a profit of ` 180 lakhs for the financial year 2018-19 before
setting·off the eligible losses of Wuyu Ltd. but after providing depreciation @ 15% p.a. on
` 140 lakhs, being the consideration at which plant and machinery were transferred by
Wuyu Ltd. to Rayu Ltd. The WDV as per Income-tax records of Wuyu Ltd. as on 1.4.2018
was ` 98 lakhs.
The above profit of Rayu Ltd. includes speculation business profit of ` 15 lakhs.
Compute the total income of Rayu Ltd. for the A.Y. 2019-20 and indicate the losses/other
allowances to be carried forward by it. Assume the amalgamation is within the meaning
of section 72A of the Income-tax Act,1961. Give reasons for treatment of each item.
(8 Marks)
(b) Mr. Robert, a non-resident, (aged 38) operates a ship for the carriage of goods,
passengers and livestock between Dubai, Mumbai and Chennai. He provides you the
following particulars for· the previous year 2018-19:
(i) Received ` 200 Lakhs in India on account of carriage of livestock from Mumbai to
London.
(ii) Received ` 50 Lakhs in India on account of carriage of passengers from Dubai to
Colombo.
(iii) Received ` 65 Lakhs in Dubai on account of carriage of goods from Chennai to
Dubai.
(iv) Expenses incurred during the year in respect of operation of such ships ` 195
Lakhs.
(v) Winning from horse races in India ` 25 Lakhs
Compute the total income of Mr. Robert Chargeable to tax in India for the assessment
year 2019-20. Also, calculate the tax payable thereon. (6 Marks)
Answer
(a) Computation of total income of Rayu Ltd for the A.Y. 2019-20
Particulars ` (in lakhs)
Business income before setting-off brought forward losses of 180.00
Wuyu Ltd.
Add: Excess depreciation claimed in the scheme of
amalgamation of Wuyu Ltd. with Rayu Ltd.
Value at which plant and machinery is transferred by 140.00
Wuyu Ltd.
WDV in the books of Wuyu Ltd. 98.00
Excess value accounted by Rayu Ltd. 42.00
Excess depreciation claimed in computing taxable
profits from business of Rayu Ltd. [` 42 lacs × 15%] 6.30
[Explanation 2 to section 43(6)]
186.30
Less: Brought forward losses of Wuyu Ltd.
- business loss of Wuyu Ltd (See Note 1) (150.00)
- unabsorbed depreciation by virtue of section 32(2) (13.00)
read with section 72A (See Note 1)
- unabsorbed capital expenditure on scientific (3.00)
research by virtue of section 35(1)(iv) read with
section 35(4) (See Note 2)
- Speculation business loss (See Note 3) -
Business income/Total Income 20.30
Notes:
(1) In the case of amalgamation of companies, the unabsorbed business losses (except
speculation business loss) and unabsorbed depreciation of the amalgamating
company shall be deemed to be the loss or unabsorbed depreciation of the
amalgamated company for the previous year in which the amalgamation was
effected and such business loss and unabsorbed depreciation shall be carried
forward and set-off by the amalgamated company for a period of 8 years and
indefinitely, respectively.
(2) As per section 35(4), the provisions relating to unabsorbed depreciation under
section 32(2) shall apply in relation to deduction allowable under section 35(1)(iv) in
respect of capital expenditure on scientific research related to the business carried
on by the assessee. Therefore, unabsorbed capital expenditure on scientific
research can be set-off and carried forward in the same manner as unabsorbed
depreciation.
(3) The accumulated loss to be carried forward specifically excludes loss sustained in a
speculative business. Therefore, speculative loss of ` 5 lacs of Wuyu Ltd. cannot be
carried forward by Rayu Ltd. for set-off against its speculative business profit.
(4) There is no loss or allowance to be carried forward by Rayu Ltd. to A.Y.2020-21.
(b) Computation of total income and tax payable by Mr. Robert
Amount (`)
Section 44B provides that profits and gains of a non-resident
engaged in the business of operation of ships are to be taken
@7.5% of the aggregate of the following amounts:
(i) paid or payable, whether in or out of India, to the assessee or
to any person on his behalf on account of carriage of
passengers, livestock, mail or goods shipped at any port in
India; and
(ii) received or deemed to be received in India by or on behalf of
the assessee on account of the carriage of passengers,
livestock, mail or goods shipped at any port outside India.
These provisions for computation of the income from the shipping
business in case of non-residents would apply notwithstanding
anything to the contrary contained in the provisions of sections 28 to
43A.
Accordingly, profits from shipping business of Mr. Robert computed
as follows:
(i) Amount received in India on account of carriage of livestock 200 lakhs
from Mumbai to London
(ii) Amount received in India on account of carriage of passengers 50 lakhs
from Dubai to Colombo
(iii) Amount received in Dubai on account of carriage of goods 65 lakhs
from Chennai to Dubai
Total amount received 315 lakhs
Profits and gains chargeable under head profits and gains from 23,62,500
business or profession @7.5% of the total amount received

Income from other sources
Winning from horse races in India [assumed to be the gross amount] 25,00,000
Total Income 48,62,500
Tax on winning from horse races @ 30% 7,50,000
Tax on balance income of ` 23,62,500
Upto ` 2,50,000 Nil
` 2,50,001 – ` 5,00,000 12,500
` 5,00,001 – ` 10,00,000 1,00,000
` 10,00,001 – ` 23,62,500 4,08,750 5,21,250
12,71,250
Add: Health and Education Cess @4% 50,850
Tax liability 13,22,100
Less: Tax deduction at source on winnings from horse races [31.2% 7,80,000
of ` 25,00,000]
Tax payable [See Note below] 5,42,100
Note: The tax payable would get further reduced by the amount of tax paid under section
172(4). The amount of tax payable under section 172 would be 41.6% (being the rate
applicable to a foreign company) of 7.5% of ` 265 lakhs (being the amounts payable for
goods shipped at a port in India) = ` 8,26,800. After reducing this amount, the tax
refundable on total income would be ` 2,84,700.
Question 3
(a) Supporting the Girl Child, a charitable trust, is registered under section 12AA of the Act.
On 1.4.2018, it got merged with M/s. Ananya P Ltd., which is a company engaged in
manufacturing of stationery items. All the assets and liabilities of the erstwhile trust
became the assets and liabilities of M/s. Ananya P Ltd who is not entitled for registration
under section 12AA of the Act. The trust appointed a registered valuer for the valuation of
its assets and liabilities. From the following particulars (including the valuation report),
calculate the tax liability in the hands of the trust arising as a result of such merger:
(i) Stamp duty value of land held ` 15 lakhs. However; if this land is sold in the open
market, it would ordinarily fetch ` 17 lakhs. The book value of the land is ` 20
lakhs.
(ii) 75,000 equity shares in Idom Ltd. traded in Bombay Stock Exchange. The lowest
price per share on 1.4.2018 was ` 75 and the highest price on that day was ` 85.
The book value was ` 67 lakhs.
(iii) 55,000 preference shares held in Niharika Ltd. The shares will fetch ` 44 lakhs, if
they are sold in the open market on 1.4.2018. Book value was ` 25 Lakhs.
(iv) Corpus fund as on 1.4.2018 ` 15 Lakhs.
(v) Outside liabilities ` 90 lakhs
(vi) Provision for taxation ` 5 lakhs.
(vii) Liabilities in respect of payment of various utility bills f 6 lakhs.
Note: Give reasons for treatment of each item. (8 Marks)
(b) Mr. Kalpesh, aged 56 years, a resident individual furnishes the following particulars of
income earned by him in India and country ''T" for the previous year 2018-19. India has
not entered into double taxation avoidance agreement with country "T".
Income from profession carried on in India 6,00,000
Agricultural Income in Country "T" 75,000
Dividend from a company incorporated in Country ''T" 1,20,000
Royalty income from a literary book from Country ''T" 4,00,000
Expenses incurred for earning royalty 60,000
Business loss in Country "T" 75,000
As per income-tax law of Country ''T" Business loss is not eligible for set off against any
other incomes. The rate of income-tax in country ''T" is 20%.
Compute total income and tax payable by Mr. Kalpesh in India for A.Y. 2019-20
assuming that he satisfies all conditions for the purpose of section 91. (6 Marks)
Answer
(a) As per section 115TD, the accreted income of “Supporting the Girl Child”, a charitable
trust, registered under section 12AA which is merged with M/s Ananya P Ltd., an entity
not entitled for registration under section 12AA, would be chargeable to tax at maximum
marginal rate @ 34.944% [30% plus surcharge @12% plus cess@4%].
Computation of accreted income and tax liability in the hands of the trust
arising as a result of merger with Ananya Pvt. Ltd. for A.Y. 2019-20
Aggregate FMV of total assets as on 1.4.18, being the specified date 1,21,00,000
(date of merger)
[See Working Note 1]
Less: Total liability computed in accordance with the prescribed method
of valuation
[See Working Note 2] 96,00,000

Accreted Income 25,00,000
Tax Liability @ 34.944% of ` 25,00,000 8,73,600
Working Notes:
(1) Aggregate fair market value of total assets on the date of
merger
- Land, being an immovable property 17,00,000
[The fair market value of land would be higher of ` 17 lakhs
i.e., price that the land would ordinarily fetch if sold in the
open market and ` 15 lakhs, being stamp duty value as on
the specified date]
- Quoted equity shares in Idom Ltd. [75,000 x ` 80 pe 60,00,000
share]
[` 80 per share, being the average of the lowest (` 75) and
highest price (` 85) of such shares on the date of merger]
- 55,000 preference shares of Niharika Ltd.
[The fair market value which it would fetch if sold in the open
market on the date of merger i.e. FMV on 1.4.2018] 44,00,000
1,21,00,000
(2) Total liability
- Outside liabilities 90,00,000
- Corpus Fund of ` 15 lakhs [not includible] -
- Provision for taxation ` 5 lakhs [not includible] -
- Liabilities in respect of payment of various utility bills [since
this liability is an ascertained liability] 6,00,000
96,00,000
(b) Computation of total income of Mr. Kalpesh for A.Y.2019-20
Particulars ` `
Profits and Gains of Business or Profession
Income from profession carried on in India 6,00,000
Less: Business loss in Country T 75,000 5,25,000
Income from Other Sources
Agricultural income in Country T [Not exempt u/s 10(1)] 75,000
Dividend received from a company incorporated in 1,20,000
Country T
Royalty income from a literary book in Country T (after
deducting expenses of ` 60,000) 3,40,000 5,35,000

Gross Total Income 10,60,000
Less: Deduction under Chapter VIA
Under section 80QQB – Royalty income of a
resident from a literary book 4 3,00,000
Total Income 7,60,000
Computation of tax liability of Mr. Kalpesh for A.Y.2019-20
Particulars `
Tax on total income [20% of ` 2,60,000 plus ` 12,500] 64,500
Add: Health and education cess @4% 2,580
Tax Liability 67,080
Calculation of Rebate under section 91:
Average rate of tax in India [i.e., ` 67,080 / ` 7,60,000 x 8.826%
100]
Average rate of tax in Country T 20%
Doubly taxed income pertaining to Country T `
Agricultural Income 75,000
Royalty Income [` 4,00,000 – ` 60,000 (Expenses) – 40,000
` 3,00,000 (deduction under section 80QQB)] 5
Dividend income 1,20,000
2,35,000
Less: Business Loss set off 75,000
1,60,000
Rebate under section 91 on ` 1,60,000 @ 8.826% [being the lower of
average Indian tax rate (8.826%) and foreign tax rate (20%)] 14,122
Tax Payable 52,958
Tax Payable (Rounded off) 52,960
Question 4
(a) Discuss the liability of TDS provisions in the following independent cases:
(i) X Ltd. is a producer of natural gas. During the year, it sold natural gas worth
` 20,50,000 to M/s Hawa Co., a partnership firm. It also incurred ` 2,00,000 as
4It is assumed that the royalty earned outside India has been brought into India in convertible foreign exchange within a
period of six months from the end of the previous year.
5Doubly taxed income includes only that part of income which is included in the assessees total income. The amount
deducted under Chapter VIA is not doubly taxed and hence, no relief is allowable in respect of such amount – CIT v. Dr.
R.N. Jhanji (1990) 185 ITR 586 (Raj.).
freight for the transportation of gas. It raised the invoice and clearly bifurcated the
value of gas as well as the transportation charges.
(ii) Beta Ltd, gave a contract to Alpha Ltd. for the supply of 2000 pens on which the
logo of Beta Ltd. was printed. The raw materials were purchased by Alpha Ltd. from
C Ltd., which is not related to Beta Ltd. The consideration paid for the pens was
` 1,50,000.
(iii) M/s. Taba Ltd. enters into a contract with Mr. Babu for the transportation of its
products from its plant to warehouses. It pays a lump-sum amount of ` 2,50,000 to
Mr. Babu for the year at the year end. Mr. Babu is engaged in the business of plying
goods carriages on hire. Mr. Babu is not an assessee under Income-tax Act and
thus did not provide PAN to Taba Ltd.
(iv) M/s. Sunivesh Investors is engaged in the business of stock broking, depositories,
mobilisation of deposits and marketing of public issues. It is a registered member of
Bombay Stock Exchange. Every year it makes payment amounting to ` 10 lakhs, to
the Stock Exchange by way of transaction charges in respect of fully automated
online trading facility. This service is available to all members of the stock
exchange in respect of every transaction that is entered into. Would it be liable for
tax deduction under section 194J? (8 Marks)
(b) Muskaan Ltd. (MK India) is an Indian company that manufactures cricket kits in India. MK
India is eligible for deduction under section 10AA of the Income-tax Act, 1961. For its UK
sales, MK India has entered into a marketing arrangement with Kits Sports (KS UK), a
UK incorporated firm. MK India uses the patented design provided by KS UK for
manufacturing of cricket kits by it. MK India supplied 30,000 sports kits to KS UK for
` 5,000 per kit. In the assessment, the Assessing Officer, increased the price charged
by MK India from KS UK to ` 6,000 per kit. MK India accepts such transfer price
adjustment adopted by the Assessing officer. As a result, there is an increase in the
income of MK India. You are required to answer the following questions in this respect:
(1) Would MK India and KS UK be treated as associate enterprises for the purposes of
transfer pricing adjustment adopted by the Assessing Officer?
(2) What is the liability of KS UK in respect of the change in Ann's Length Price (ALP)
in respect of purchases made by it from MK India?
(3) MK India contends that since the income is increased because of the arm's length
price adopted by the Assessing Officer, the deduction claimed by it under section
10AA should also be increased accordingly, since the amount of deduction is based
upon the amount of the export sale. Discuss whether the contention of MK India is
valid. (6 Marks)
Answer
(a) (i) TDS u/s 194C is attracted on any sum payable to a resident contractor for carrying
out any work. Since X Ltd., the producer of natural gas sells as well as transports
the gas to the purchaser, M/s. Hawa Co., a partnership firm, till the point of delivery,
where the ownership of gas is simultaneously transferred, the manner of raising the
sale bill (whether the transportation charges are embedded in the cost of gas or
shown separately) does not alter the basic nature of such contract which remains
essentially a ‘contract for sale’ and not a ‘works contract’ as envisaged in section
194C.
Therefore, in such circumstances, TDS provisions under section 194C are not
applicable on the component of Gas Transportation Charges payable by M/s. Hawa
Co. to X Ltd. 6 Consequently, there is no liability to deduct tax at source under
section 194C in this case.
(ii) TDS u/s 194C is attracted on any sum payable to a resident contractor for carrying
out any work. However, “work” shall not include manufacturing or supplying a
product according to the requirement or specification of a customer by using raw
material purchased from a person, other than such customer, as such a contract is
a ‘contract for sale’.
In this case, since Alpha Ltd. has to supply pens to Beta Ltd. by using materials
purchased from C Ltd., the contract for supply of pens is a ‘contract for sale’ and not
a works contract. Consequently, there is no liability to deduct tax at source under
section 194C in this case.
(iii) Tax is not required to be deducted at source under section 194C from the sum
credited or paid to the account of a contractor, during the course of the business of
plying, hiring or leasing goods carriages, if he furnishes his PAN to the deductor.
In this case, since Mr. Babu has not furnished his PAN to M/s. Taba Ltd., M/s. Taba
Ltd. has to deduct tax at source@20% as per section 206AA on lumpsum payment
of ` 2,50,000 to Mr. Babu, since the same exceeds the aggregate threshold of
` 1,00,000.
(iv) Under section 194J, TDS is attracted in respect of, inter alia, fees for technical
services. Technical services like managerial and consultancy services are in the
nature of specialised services made available by the service provider to cater to the
special needs of the customer-user as may be felt necessary. It is the above
feature that distinguishes or identifies a service provider from a facility offered
However, the service provided by the BSE for which transaction charges are paid
does not satisfy the test of specialized, exclusive and individual requirement of the
user or the consumer who may approach the service provider for such assistance or
6 CBDT Circular No. 9/2012 dated 17.10.2012

service. Therefore, the transaction charges paid to BSE by its members are not for
technical services but are in the nature of payments made for facilities provided by
the stock exchange. Such payments would, therefore, not attract the provisions of
tax deduction at source under section 194J. 7
Accordingly, payment of transaction charges of ` 10 lakhs by M/s. Sunivesh
Investors to BSE in respect of fully automated online trading facility would not be
liable for tax deduction at source under section 194J.
(b) (1) Manufacturing of cricket kits by MK India is wholly dependent on the use of
patented design provided by KS UK and therefore MK India and KS UK are deemed
to be associated enterprises as per section 92A(2).
Supply of cricket kits by MK India, a resident, to KS UK, a non-resident, would be an
international transaction between associated enterprises, and hence, transfer
pricing provisions would be attracted in this case.
(2) The increased amount of ` 3 crore shall be treated as an advance given by M.K.
India to KS UK which is required to be repatriated by KS UK within 90 days from
the date of order.
(3) As per the first proviso to section 92C(4), in respect of the increased income of ` 3
crores, no deduction under section 10AA shall be allowed to MK India.
Hence, the contention of MK India that deduction under section 10AA should be
increased is not valid.
Question 5
(a) Answer any two out of the following three questions:
(i) Mr. Raja, a resident individual died on 15.1.2019. Some reassessment proceedings
in respect of his income chargeable to tax were pending on that date. Mr. Nitin is
the legal heir of Late Raja. The Assessing Officer continued the reassessment
proceedings without bringing the legal heir Mr. Nitin on record though Mr. Nitin
informed the demise of Raja and also participated in the assessment. After the
completion of assessment, Mr. Nitin contends that the order of assessment is bad in
law. Decide the validity of the contentions of Mr. Nitin.
(ii) SRM Tech Ltd. is engaged in the manufacture of multi-layer tubes and other
specialty packaging and plastic products. It came out with an initial public issue of
shares during the relevant assessment year and deposited the share application
money received in banks. The share capital was received by the SRM Tech Ltd. to
meet capital expenditure for setting up of its factory. As the funds were not
immediately required, it made temporary deposits with bank which earned interest.
This interest income of ` 1.71 crores was treated as abatement of capital cost of the
7 It was so held by the Supreme Court in CIT v. Kotak Securities Ltd (2016) 383 ITR 1
project/factory by the company and set off such interest earned against public issue
expenses, in the books of account. The AO is of the opinion that the same should
be treated as revenue receipt and taxed the same as income from ‘Other Sources'.
Decide the correctness of action of the Assessing Officer.
(iii) M/s Jonga and Jonga decided to expand its jeep product line and entered into an
agreement with K Inc., an American company, which agreed to sell it dies, welding
equipment and die models. The purchase consideration was agreed at $ 65000
including cost, insurance and freight and K Inc., agreed to advance a loan to the
assessee at 6% interest per annum repayable after 10 years in instalments. The
Reserve Bank of India and the concerned Ministry approved the loan agreement.
Later on, XL Inc., took over K Inc., and agreed to waive the principal amount of loan
advanced by K Inc., to Jonga and Jonga and to cancel the promissory notes as and
when they matured. This was communicated to the assessee-company which filed
its return showing ` 35 Lakh as cessation of liability in its books of account.
The Income-tax Officer concluded that the waiver of the loan amount represented
income and held that the sum of ` 35 Lakh is taxable under section 28(iv) as
income. The alternate argument of the Revenue authorities was that the sum would
be taxable under section 41(1) as a waiver of a trading liability.
Examine the validity of Assessing Officer's action. (2 x 4 = 8 Marks)
(b) M/s. Raghuram Co. Ltd., Mumbai entered into the following agreements with various non-
resident entities during the previous year 2018-19:
(i) Paid ` 4,00,000 to M/s. Neil Inc., a company based in USA for online advertisement
of its products. M/s. Neil Inc., does not have a PE in India.
(ii) Paid ` 50,000 to Mr. David, a non-resident individual, against providing digital
space for online advertisement of its products.
(iii) Paid ` 1,55,000 to M/s LOX Ltd., for providing a platform for sale of its used
furniture items. M/s. LOX Ltd., is a company based in New Zealand and does not
have a PE in India.
Discuss the relevant provisions of Income-tax Act, in respect of such agreements and
also state the tax implications of such payments. (6 Marks)
Answer
(a) (i) The issue under consideration in this case is whether the order of assessment of
deceased person completed without bringing the legal representative on record is
bad in law.
As per section 159(2), for making a reassessment of the income of the deceased
person, any proceeding taken against the deceased before his death shall be
deemed to have been taken against the legal representative and may be continued
against the legal representative from that stage.
In a case where an assessee dies pending any assessment proceedings, the
Assessing Officer is required to pass appropriate orders of assessment after due
notice to legal representative of deceased assessee.
However, in the instant case, the Assessing Officer continued the assessment
proceedings without bringing Mr. Nitin, the legal heir, on record by issuing any
notice for such proceedings after the death of his father on 15.01.2019.
Therefore, the contention of the Mr. Nitin that the order of assessment is bad in law,
is correct.
Note – The facts of the case are similar to the facts in CIT vs. Dalumal Shyamumal
(2005) 276 ITR 62 wherein the above issue came up before the MP High Court. The
above answer is based on the rationale of the High Court in the said case.
(ii) The issue under consideration is whether the interest income from share application
money is taxable under the head ‘Income from Other Sources’, or can the same be
set-off against public issue expenses.
The assessee-company is statutorily required to keep share application money in a
separate account till the allotment of shares was completed. Part of the share
application money would normally have to be returned to unsuccessful applicants,
and therefore, the entire share application money would not ultimately be
appropriated by the company. The interest earned was inextricably linked with the
requirement of raising share capital.
Any surplus money deposited in the bank for the purpose of earning interest is liable
to be taxed as “Income from Other Sources”. However, the share application money
is deposited with the bank not to make additional income but to comply with the
statute. The interest accrued on such deposit is merely incidental.
Moreover, the issue of shares relates to capital structure of the company and hence,
expenses incurred in connection with the issue of shares are to be capitalized.
Thus, the contention of the Assessing Officer that the interest accrued by SRM Tech
Ltd. of ` 1.71 crores on deposit of share application money with bank is taxable as
income from other sources is not correct.
Such interest is eligible for set off against the public issue expenses and hence, not
taxable as “Income from Other Sources”
Notes –
(1) The facts of the case are similar to the facts in CIT v. Sree Rama Multi Tech
Ltd. [2018] 403 ITR 426, wherein the above issue came up before the Apex
Court. The above answer is based on the rationale of the Supreme Court in the
said case.
(2) Alternative Answer – The facts given in the question do not mention about the
statutory requirement of deposit of application money. Also, it states that the
share capital was received by SRM Tech Ltd. to meet the capital expenditure
for setting up its factory. Reference to share capital instead of share
application money appears to indicate that the process of allotment is complete.
Furthermore, it is mentioned that as the funds were not immediately required,
the company made temporary deposits with bank which earned interest.
Due to these reasons, it is possible to take a view that interest earned on
temporary deposit of share capital (and not share application money) with bank,
which is to be used to meet the capital cost of factory, is deductible from the
cost of the asset(s). It was so held by the Karnataka High Court in Pr
Commissioner Of Income Tax vs M/S Bank Note Paper Mill India Pvt. Ltd.
Even if this view is taken, the contention of the Assessing Officer would be
incorrect.
(iii) The issue under consideration is whether the sum due by the assessee, M/s. Jonga
and Jonga, to K Inc, which has been waived off later on by XL Inc. (which took over
K Inc.), constitutes taxable income in the hands of the assessee.
As per section 28(iv), the value of any benefit or perquisite, whether convertible into
money or not, arising from business or the exercise of the profession is chargeable
to tax under the head “Profits and gains from business or profession”.
Where an allowance or deduction has been made in any assessment year in
respect of trading liability incurred by assessee and the assessee has obtained
some benefit in respect of such trading liability by way of remission or cessation
thereof, then, the value of benefit accruing to him shall be taxed as business income
under section 41(1) of that previous year
For applicability of section 28(iv), income must arise from business or profession and
the benefit received has to be in non-monetary form. In the instant case, the amount
of ` 35 lakh, being a cash receipt, therefore, does not fall under section 28(iv).
Further, for being covered under section 41(1), the assessee-company should have
claimed an allowance or deduction in any assessment for any year in respect of a
trading liability incurred by the assessee. Subsequently, during any previous year, if
the creditor waives such liability, the assessee-company would be liable to pay tax
under section 41.
In the instant case, the loan was taken for procurement of capital assets, namely,
plant, machinery and tooling equipment. The purchase amount had not been
debited to the trading account or to the profit and loss account in any of the
assessment years. Hence, waiver of such loan would not tantamount to cessation of
a trading liability.
Thus, the action of Assessing Officer is not correct. The amount of loan waived
would not be taxable either under section 41(1) or under section 28(iv).
Notes -
(1) As per section 2(24)(xviii), assistance in the form of waiver by the Central
Government or State Government or any authority or body or agency in cash or kind
to the assessee would be included in the definition of “income”. In this case, the
waiver is by a foreign company, and hence, is not included within the scope of
definition of “income” under section 2(24).
Further, it may be noted that as per Explanation 10 to section 43(1), deduction on
account of, subsidy or grant or reimbursement, by whatever name called, received
from any person has to be made while computing actual cost. Since waiver has not
been expressly included in the said Explanation, it is possible to take a view that the
same is not deductible while computing the actual cost. However, if a view is taken
that “waiver” is included within the scope of the phrase “by whatever name called” in
the said Explanation, then, the same has to be deducted while computing actual cost.
(2) The facts of the case are similar to the facts in CIT v. Mahindra and Mahindra
Ltd. [2018] 404 ITR 1, wherein the above issue came up before the Apex Court.
The above answer is based on the rationale of the Supreme Court in the said case.
(b) Chapter VIII of the Finance Act, 2016, provides for an equalisation levy of 6% of the
amount of consideration for specified services received or receivable by a non-resident
not having permanent establishment (PE) in India, from a resident in India who carries
out business or profession, or from a non-resident having PE in India.
“Specified services” means -
(i) Online advertisement;
(ii) Any provision for digital advertising space or any other facility or service for the
purpose of online advertisement;
(iii) Any other service as may be notified by the Central Government.
However, equalization levy is not chargeable where the aggregate amount of
consideration for specified service received or receivable in a previous year by the non-
resident from a person resident in India and carrying on business or profession, or from a
non-resident having a PE in India, does not exceed ` 1 lakh.
Further, equalization levy is not attracted where payment for specified service is not for
the purposes of carrying out business or profession.
(i) In this case, equalisation levy @6% is chargeable on the amount of ` 4,00,000
received by M/s Neil Inc., a non-resident not having a PE in India, from
M/s Raghuram Co. Ltd., an Indian company for online advertisement of its products.
Accordingly, M/s Raghuram Co. Ltd. is required to deduct equalisation levy of
` 24,000 i.e., @6% of ` 4 lakhs, being the amount paid towards online
advertisement services provided by M/s Neil Inc.
Non-deduction of equalisation levy would attract disallowance under section
40(a)(ib) of 100% of the amount paid to M/s. Neil Inc. while computing business
income of M/s. Raghuram Co. Ltd.
(ii) In this case, equalisation levy is not chargeable as the amount of consideration of
` 50,000 for digital space for online advertisement paid to Mr. David does not exceed
` 1,00,000.
(iii) In this case, equalisation levy is not chargeable on the amount of ` 1,55,000
received by M/s LOX Ltd., a non-resident not having a PE in India, from
M/s Raghuram Co. Ltd., an Indian company, since the said payment was for
providing a platform for sale of its used furniture items and not for the purposes of
carrying on business or profession.
Question 6
(a) Mr. Jayant and Mr. Basant, created, a trust, out of the insurance policy amount received
upon the death of their father. The trust deed named Jayant and Basant as the trustees
and Mrs. Kamla and Mrs. Vimla (their sisters) as the beneficiaries. However, it is the
discretion of the trustees that they may either accumulate the net income of the trust or
pay the same to any one or both the beneficiaries. During the previous year
2018-19, the total income of the trust amounted to ` 10,50,000. You are required to
discuss the relevant provisions of the Income-tax Act in this regard and calculate the tax
payable by the trust, if any.
What would be your answer if the trust was created under the 'Will' of the deceased
father and such trust is the only trust so created under the 'Will'? (4 Marks)
(b) Under the provisions of a tax treaty between India and Country V, if a resident of country
V makes any capital gains by selling the shares in any Indian Company, such capital
gains will be taxable only in Country V and it will be exempt from tax in India. However,
as an exception it is also provided that, such exemption is not available if the, transferor
holds more than 10% interest in the equity capital of the Indian Company. VFX Ltd., a
resident in Country V floated two wholly owned subsidiaries in country V. On 1.4.2018,
both the subsidiaries bought 9% shareholding in XYZ Co. Ltd., an Indian Company.
These subsidiaries do not have any other income. On 31.12.2018, both of them sold the
investment in XYZ Co. Ltd. Each of the subsidiaries claim exemption from Indian capital
gains tax amounting to ` 2.5 crores from such sale, as each is holding less than 10%
equity shares in the Indian Company. Can GAAR be invoked in such case to deny the
treaty benefit?
Will your answer be different if the capital gain tax on such sale is calculated at ` 1.2
crores each? (4 Marks)
(c) For the Assessment Year 2018-19, Mr. John, was directed to carry out a special audit of
his accounts under section 142(2A) on 1.8.2018, without giving him an opportunity of
being heard.
Answer the following questions in this regard:
(i) Can the assessee contend that since reasonable opportunity of being heard is not
provided to him by the Assessing Officer, such notice requiring the special audit of
accounts is not valid?
(ii) If the assessee decides to get his books of account audited under section 142(2A),
what will be the due date by which he has to submit the audit report (including the
extended time, if any, allowed to him)?
(iii) If the assessee intentionally does not comply with the directions. How much penalty
can be levied on him?
(iv) For failure to get the books of account audited 'under section 142(2A), can
prosecution proceedings be launched against the assessee? If yes, what will be the
quantum of punishment for such default?
(v) Can the assessee approach the Settlement Commission to grant immunity from
penalty and prosecution proceedings initiated against him? If yes, discuss the
power of Settlement Commission to grant immunity in this regard. (6 Marks)
Answer
(a) The trust created by Mr. Jayant and Mr. Basant out of the insurance policy amount
received upon the death of their father is a private discretionary trust, as it vests with the
trustees a discretionary power to pay the beneficiaries, or accumulate the income, as the
trustees think fit.
In case of a private discretionary trust, declared by a duly executed trust deed, where the
shares of the beneficiaries are unknown 8, as in this case, the trustees, Mr. Jayant and
Mr. Basant, would be liable as representative assessees.
Since the income of the trust does not include profits and gains of business, it is taxable
at the maximum marginal rate of 35.88% [i.e., 30% + surcharge@15% + cess@4%]. The
tax payable would be ` 3,76,740, being 35.88% of ` 10,50,000.
8 It is presumed that the shares are unknown.

However, where the trust is created under the “Will” of the deceased father and such
trust is the only trust so created under the “Will”, then, the income of the trust would be
chargeable to tax as if it were the income of an association of persons.
(b) The arrangement by VFX Ltd., a resident in Country V, of floating two wholly owned
subsidiaries and splitting the investment in equity shares of the Indian company through
such subsidiaries appears to be with the intention of obtaining tax benefit under the
treaty between India and Country V, so that the individual subsidiaries do not hold more
than 10% interest in the equity capital of the Indian company.
Further, there appears to be no commercial substance in creating two subsidiaries as
they do not change the economic condition of investor VFX Ltd. in any manner (i.e. on
business risks or cash flow), and reveals a tainted element of abuse of tax laws.
Since the tax benefit in the P.Y.2018-19 in aggregate is ` 5 crores (` 2.5 crores x 2),
which exceeds the specified threshold of ` 3 crores, the arrangement can be treated as
an impermissible avoidance arrangement and GAAR can be invoked. Consequently,
treaty benefit would be denied by ignoring the two subsidiaries, or by treating the two
subsidiaries as one and the same company for tax computation purposes.
If the capital gains tax on such sale is calculated at ` 1.2 crores each, the tax benefit of
` 2.4 crores would be less than the specified threshold of ` 3 crores. Hence, GAAR
cannot be invoked in such case.
(c) (i) As per the proviso to section 142(2A), the Assessing Officer shall not direct the
assessee to get the accounts audited unless the assessee has been given a
reasonable opportunity of being heard.
Accordingly, the contention of the assessee that notice requiring special audit is not
valid since reasonable opportunity of being heard has not been provided to him by
the Assessing Officer is correct.
(ii) The maximum period (including extended time, if any, allowed) within which the
assessee has to submit his audit report is 180 days from 1.8.2018, being the date
on which direction to carry out a special audit of accounts under section 142(2A) is
received by the assessee. Accordingly, in this case, the assessee has to submit his
audit report by 27.1.2019.
(iii) Penalty of ` 10,000 is leviable under section 272A(1)(d) for failure to comply with a
direction issued under section 142(2A).
(iv) If the assessee wilfully fails to comply with a direction issued to him under section
142(2A), he shall be punishable with rigorous imprisonment for a term which may
extend to one year and with fine under section 276D.
(v) The assessee can approach the Settlement Commission to grant immunity from
penalty and prosecution, if the additional amount of income-tax payable on income
disclosed in the settlement application exceeds ` 50 lakh, where the assessee is
the subject matter of search and ` 10 lakh, in other cases.
If the Settlement Commission is satisfied that the assesse has co-operated with it in
the conduct of proceedings before it and has made a true disclosure of income, and
the manner in which such income has been derived, it may grant to such person
immunity from penalty and prosecution for failure to comply with direction under
section 142(2A).
However, the Settlement Commission cannot grant immunity from prosecution
where prosecution proceedings have been initiated before the date of receipt of
application under section 245C.
PAPER – 8: INDIRECT TAX LAWS
1. Question paper comprises of 6 questions. Answer question no. 1 which is compulsory and
any 4 questions out of the remaining 5 questions.
2. Working notes should form part of the answer.
3. All the questions should be answered on the basis of position of (i) GST laws as amended
by significant notifications/circulars issued till 31 st October, 2018 and (ii) Customs law as
amended by Finance Act, 2018 and significant notifications/circulars issued till 31 st
October, 2018.
Question 1
(a) Vansh Shoppe is a registered supplier of both taxable and exempted goods, registered
under GST in the State of Rajasthan. Vansh Shoppe has furnished the following details
for the month of April, 2019;
`
(1) Details of sales:
Sales of taxable goods 50,00,000
Sales of goods not leviable to GST 10,00,000
(2) Details of goods purchased for being sold in the shop:
Taxable goods 45,00,000
Goods not leviable to GST 4,00,000
(3) Details of expenses:
Monthly rent payable for the shop 3,50,000
Telephone expenses paid 50,000
(` 30,000 for land line phone installed at the shop and ` 20,000 for
mobile phone given to employees for official use)
Audit fees paid to a Chartered Accountant 60,000
(` 35,000 for filing of income tax return & the statutory audit of
preceding financial year and ` 25,000 for filing of GST return)
Premium paid on health insurance policies taken for specified 10,000
employees of the shop. The Government has not notified such health
insurance service under section 17(5)(b)(iii)(A) CGST Act, 2017
Freight paid to goods transport agency (GTA) for inward 50,000
transportation of non-taxable goods
Freight paid to goods transport agency (GTA) for inward 1,50,000
transportation of taxable goods
GST paid on goods given as free samples 5,000
PAPER – 8: INDIRECT TAX LAWS 67
All the above amounts are exclusive of all kind of taxes, wherever applicable.
All the purchases and sales made by Vansh Shoppe are within Rajasthan. All the
purchases are made from registered suppliers. All the other expenses incurred are also
within Rajasthan.
Assume, wherever applicable, for purpose of reverse charge payable by Vansh Shoppe,
the CGST, SGST and IGST rates as 2.5%, 2.5% and 5% respectively. CGST, SGST and
IGST rates to be 6%, 6% and 12% respectively in all other cases.
There is no opening balance in the electronic cash ledger or electronic credit ledger.
Assume that all the necessary conditions for availing the ITC have been complied with.
Ignore interest, if any.
You are required to compute the following:
(1) Input Tax Credit (ITC) credited to Electronic Credit Ledger
(2) Common credit
(3) ITC attributable towards exempt supplies out of common credit
(4) Net GST liability for the month of April, 2019 (10 Marks)
(b) Asha Enterprises, supplier of sewing machines, is located in Kota (Rajasthan) and
registered for purpose of GST in the said State. It receives an order from Deep Traders,
located in Jalandhar (Punjab) and registered for the purpose of GST in the said State. The
order is for the supply of 100 sewing machines with an instruction to ship the sewing
machines to Jyoti Sons, located in Patiala (Punjab) and registered in the said State for
purpose of GST. Jyoti Sons is a customer of Deep Traders. Sewing machines are being
shipped in a lorry by Asha Enterprises.
Briefly explain the following:
(a) the place of supply under IGST Act, 2017; (b) the nature of supply:- whether
inter-State or intra-State and
(c) whether CGST/SGST or IGST as would be applicable in this case. (4 Marks)
Answer
(a) (1) Computation of ITC credited to Electronic Credit Ledger
ITC of input tax attributable to inputs and input services intended to be used for
business purposes is credited to the electronic credit ledger. Input tax attributable to
inputs and input services intended to be used exclusively for non-business purposes,
for effecting exclusively exempt supplies and on which credit is blocked under section
17(5) of the CGST Act, 2017 is not credited to electronic credit ledger [Sections 16
and 17 of the CGST Act, 2017].
In the light of the aforementioned provisions, the ITC credited to electronic credit
ledger of Vansh Shoppe is calculated as under:
Particulars Amount CGST @ SGST @
(` ) 6% (`) 6% (` )
GST paid on taxable goods 45,00,000 2,70,000 2,70,000
Goods not leviable to GST [Since non- 4,00,000 Nil Nil
taxable, no GST is paid]
GST paid on monthly rent for shop 3,50,000 21,000 21,000
GST paid on telephone expenses 50,000 3,000 3,000
GST paid on audit fees 60,000 3,600 3,600
GST paid on premium of health insurance 10,000 Nil Nil
policies
[ITC on life insurance service is blocked if
the Government has not notified such
services under section 17(5)(b)(iii)(A) of the
CGST Act].
GST paid on goods given as free samples 5,000 Nil Nil
[ITC on goods disposed of by way of free
samples is blocked under section 17(5) of
the CGST Act, 2017]
Particulars Amount CGST @ SGST @
(` ) 2.5% (`) 2.5% (` )
Freight paid to GTA for inward 50,000 Nil Nil
transportation of non-taxable goods under
reverse charge
[Since definition of exempt supply under
section 2(47) of the CGST Act, 2017
specifically includes non-taxable supply, the
input service of inward transportation of
non-taxable goods is being exclusively used
for effecting exempt supplies.]
Freight paid to GTA for inward 1,50,000 3,750 3,750
transportation of taxable goods under
reverse charge
ITC credited to the electronic ledger 3,01,350 3,01,350
(2) Computation of common credit

Common Credit = ITC credited to Electronic Credit Ledger – ITC attributable to inputs
and input services intended to be used exclusively for effecting taxable supplies
[Section 17 of the CGST Act, 2017 read with rule 42 of the CGST Rules, 2017].
Particulars CGST SGST
(`) (` )
ITC credited to Electronic Credit Ledger 3,01,350 3,01,350
Less: ITC on taxable goods 2,70,000 2,70,000
Less: ITC on freight paid to GTA for inward transportation 3,750 3,750
of taxable goods
Common credit 27,600 27,600
(3) Computation of ITC attributable towards exempt supplies out of common credit
ITC attributable towards exempt supplies = Common credit x (Aggregate value of
exempt supplies during the tax period / Total turnover during the tax period) [Section
17 of the CGST Act, 2017 read with rule 42 of the CGST Rules, 2017].
(`) (` )
ITC attributable towards exempt supplies 4,600 4,600
[` 27,600 x (` 10,00,000/` 60,00,000)]
(4) Computation of net GST liability for the month of April, 2019
(`) (` )
GST liability under forward charge
Sale of taxable goods [` 50,00,000 x 6%] 3,00,000 3,00,000
Add: Ineligible ITC [ITC out of common credit, 4,600 4,600
attributable to exempt supplies]
Total output tax liability under forward charge 3,04,600 3,04,600
Less: ITC credited to the electronic credit ledger 3,01,350 3,01,350
Net GST payable [A] 3,250 3,250
GST liability under reverse charge
Freight paid to GTA for inward transportation of taxable 3,750 3,750
goods
[` 1,50,000 x 2.5%]
Freight paid to GTA for inward transportation of non- 1,250 1,250
taxable goods
[` 50,000 x 2.5%]
Total output tax liability under reverse charge [B] 5,000 5,000
Net GST liability [A] + [B] 8,250 8,250
Note: Amount available in the electronic credit ledger may be used for making
payment towards output tax [Section 49 of the CGST Act, 2017]. However, tax
payable under reverse charge is not an output tax in terms of definition of output
tax provided under section 2(82) of the CGST Act, 2017. Therefore, tax payable
under reverse charge cannot be set off against the input tax credit and thus, will
have to be paid in cash.
(b) The supply between Asha Enterprises (Kota, Rajasthan) and Deep Traders (Jalandhar,
Punjab) is a bill to ship to supply where the goods are delivered by the supplier [Asha
Enterprises] to a recipient [Jyoti Sons (Patiala, Punjab)] on the direction of a third person
[Deep Traders].
In case of such supply, it is deemed that the said third person has received the goods and
the place of supply of such goods is the principal place of business of such person
[Section 10(1)(b) of the IGST Act, 2017]. Thus, the place of supply between Asha
Enterprises (Rajasthan) and Deep Traders (Punjab) will be Jalandhar, Punjab.
Since the location of supplier and the place of supply are in two different States, the supply
is an inter-State supply in terms of section 7 of the IGST Act, 2017, liable to IGST.
This situation involves another supply between Deep Traders (Jalandhar, Punjab) and
Jyoti Sons (Patiala, Punjab). In this case, since the supply involves movement of goods,
place of supply will be the location of the goods at the time at which the movement of goods
terminates for delivery to the recipient, i.e. Patiala, Punjab [Section 10(1)(a) of the IGST
Act, 2017].
Since the location of supplier and the place of supply are in the same State, the supply is
an intra-State supply in terms of section 8 of the IGST Act, 2017, liable to CGST and SGST.
Question 2.
(a) Mrs. Kajal, a registered supplier of Jaipur (Rajasthan), has made the following supplies in
the month of January, 2019:
(i) Supply of a laptop bag along with the laptop to a customer of Mumbai for ` 55,000
(exclusive of GST).
(ii) Supply of 10,000 kits (at ` 50 each) amounting to ` 5,00,000 (exclusive of GST) to
Ram Fancy Store in Kota (Rajasthan). Each kit consists of 1 hair oil, 1 beauty soap
and 1 hair comb.
(iii) 100 kits are given as free gift to Jaipur customers on the occasion of Mrs. Kajal's
birthday. Each kit consists of 1 hair oil and 1 beauty soap. Cost of each kit is ` 35,
but the open market value of such kit of goods and of goods of like kind and quality
is not available. Input tax credit has not been taken on the goods contained in the kit.
(iv) Event management services provided free of cost for brother's son marriage function
in Indore (Madhya Pradesh). Cost of providing said services is ` 80,000, but the open
market value of such services and of services of like kind and quality is not available.
(v) 1,400 chairs and 100 coolers hired out to Function Garden, Ajmer (Rajasthan) for
` 3,30,000 (exclusive of GST) including cost of transporting the chairs and coolers
[` 20 (exclusive of GST) for each chair and each cooler] from Mrs. Kajal's godown at
Jaipur to the Function Garden, Ajmer. The cost of transportation of chairs and coolers
is paid by Mrs. Kajal to an unregistered Goods Transport Agency (GTA).
Interest of ` 6,400 (inclusive of GST) was collected by Mrs. Kajal from Ram Fancy
Store, Kota for the payment received with a delay of 30 days.
Assume rates of GST to be as under:-
S. No. Particulars Rate of Rate of Rate of
CGST (%) SGST (%) IGST (%)
1. Laptop 9 9 18
2. Laptop bag 14 14 28
3. Hair oil 9 9 18
4. Beauty soap 14 14 28
5. Hair comb 6 6 12
6. Event management service 2.5 2.5 5
Service of renting of chairs and
7. 6 6 12
coolers
8. Transportation service 2.5 2.5 5
From the above information, compute the GST liability (CGST and SGST and /or
IGST, as the case may be) of Mrs. Kajal for the month of January, 2019. (9 Marks)
(b) ABC Industries Ltd. of Mumbai imported one machine through vessel from Japan, in the
month of September, 2018.
The following particulars are made available:
S. Particulars Amount in
No. Japanese Yen
(¥)
(i) Cost upto port of exportation incurred by exporter 6,00,000
(ii) Loading charges at port of exportation 25,000
(iii) Freight charges from port of export to port of import in India. 1,00,000
Following additional amounts paid by ABC Industries Ltd:-

S. Particulars Amount in
No. Indian
rupees (` )
(i) Designing charges, necessary for such machine, paid to 8,00,000
consultancy firm in New Delhi
(ii) Commission paid (not the buying commission) to local agent of 1,25,000
exporter.
(iii) Actual landing charges paid at the place of importation. 15,000
(iv) Actual insurance charges paid to the place of importation are not -
ascertainable.
(v) Lighterage charges paid at the port of importation 20,000
Other Information :
(i) Rate of basic customs duty is 10%
(ii) Rate of social welfare surcharge is 10%
(iii) Integrated tax leviable under section 3(7) of Customs Tariff Act, 1975 is 12%.
(iv) Ignore GST compensation cess.
(v) Rate of exchange to be taken is 1 Japanese Yen (¥) = ` 0.65
Arrive at the total customs duty, including integrated tax payable under section 3(7) of the
Customs Tariff Act, 1975 with appropriate working notes. (5 Marks)
Answer
(a) Computation of GST liability of Mrs. Kajal for the month of January, 2019
S. Particulars Amount (`) CGST (`) SGST IGST
No. (`) (`)
(i) Supply of laptop bag along with 55,000 9,900
laptop to Mumbai customer
[Being naturally bundled, supply of
laptop bag along with the laptop is a
composite supply which is treated as
the supply of the principal supply
[viz. laptop] in terms of section 8(a)
of the CGST Act, 2017 and is an
inter-State supply. Accordingly, IGST
@ 18% will be charged]
(ii) Supply of kits to Ram Fancy Store 5,05,000 70,700 70,700

[It is a mixed supply and is treated as
supply of that particular supply which
attracts highest tax rate [viz. beauty
soap] in terms of section 8(b) of the
CGST Act, 2017. Also, it’s an intra-
State supply. Accordingly, CGST
and SGST @ 14% each will be
charged.]
Further, interest of ` 6,4001 charged
for delayed payment as collected
from Ram Fancy Store will be
included in the value of supply in
terms of section 15(2) of the CGST
Act, 2017.
Therefore, total value of supply =
` 5,05,000 [` 5,00,000 + (` 6,400 ×
100/128)]
(iii) Free gifts to customers Nil Nil Nil
[Cannot be considered as supply
under section 7 read with Schedule I
of the CGST Act as the gifts are
given to unrelated customers without
consideration]
(iv) Event management services Nil Nil Nil
provided free of cost for brother’s son
marriage
[Cannot be considered as supply
under section 7 read with Schedule I
of the CGST Act as the service is
provided to unrelated person without
consideration.]
(v) Chairs and coolers hired out to 3,30,000 19,800 19,800
Function Garden
[Since Mrs. Kajal is not a GTA,
transportation services provided by
her are exempt [Notification No.
12/2017 CT(R) dated 28.06.2017].
1It has been assumed that interest on delayed payment received has been collected in the month of January,
2019 itself and is inclusive of GST.
However, since chairs and coolers

are hired out along with their
transportation, it is a case of
composite supply wherein the
principal supply is hiring out of chairs
and coolers. Also, it’s an intra-State
supply. Accordingly, transportation
service will also be taxed at the rate
applicable for renting of chairs and
coolers, viz. CGST and SGST @ 6%
each.]
(vi) Transportation of chairs and coolers 30,000 750 750
by GTA (` 20 ×1,500)
[GST on GTA services availed is
payable under reverse charge
mechanism since GST is payable @
5%2. Being an intra-State supply,
CGST and SGST will be chargeable
@ 2.5% each3.]
Total GST liability 91,250 91,250 9,900
Notes:
(1) The above answer is based on the assumption that either the event management services
are provided to brother for his son’s marriage and brother is not wholly dependent on Mrs.
Kajal or such services are provided directly to brother’s son for his marriage. However, it is
also possible to assume that the services are provided to brother for his son’s marriage and
brother is wholly dependent on Mrs. Kajal.
(2) As per section 2(30) of the CGST Act, 2017, composite supply means a supply made by a
taxable person to a recipient consisting of two or more taxable supplies. Since in point (v),
service of hiring out of chairs & coolers is taxable while transportation service is exempt (being
provided by a person other than a GTA), it is possible to take a view that this is not a case of
composite supply. In that case, the two services will be treated as independent services and
taxed accordingly.
2 It has been most logically assumed that Mrs. Kajal has not charged, from Function Garden, any mark-up on
the cost of transportation paid by her to the unregistered GTA.
3 It has been assumed that the unregistered GTA from whom the GTA services have been availed is located
in the State of Rajasthan.

(b) Computation of assessable value of the imported goods

Japanese Yen
Cost upto port of exportation 6,00,000
Add: Loading charges at the port of exportation [Note-1] 25,000
Total in Japanese Yen 6,25,000
`
Total in Indian rupees @ ` 0.65 per Japanese Yen 4,06,250.00
Add: Commission paid to local agent of exporter [Note-3] 1,25,000.00
FOB value as per customs 5,31,250.00
Add: Freight charges from port of export to port of import in India 65,000.00
[Note-1]
[1,00,000 Japanese Yen × 0.65 = ` 65,000]
Add: Lighterage charges paid by the importer at port of importation 20,000
[Note-1]
Add: Insurance charges @ 1.125% of FOB [` 5,31,250 × 1.125%] 5,976.56
[Note-4]
CIF value 6,22,226.56
Assessable Value (rounded off) 6,22,227
Add: Basic customs duty @ 10% of ` 6,22,227 62,223
(rounded off) (A)
Add: Social welfare surcharge @ 10% of ` 62,223 6,222
(rounded off) (B)
Total 6,90,672
Add: Integrated tax @ 12% of ` 6,90,672 (rounded off) (C) 82,881
Total custom duty and integrated tax payable [(A) +(B) + (C)] 1,51,326
(rounded off)
Notes:
(1) The cost of transport, loading, unloading and handling charges associated with the
delivery of the imported goods to the place of importation are includible in the
assessable value [Rule 10(2) of the Customs Valuation (Determination of Value of
Imported Goods) Rules, 2007 (CVR)]. Further, explanation to rule 10(2), inter alia,
clarifies that cost of transport of the imported goods includes lighterage charges.
(2) Design and engineering work is includible in the assessable value only when the
same is undertaken elsewhere than in India and necessary for the production of the
imported goods [Rule 10(1) of the CVR].
(3) Buying commission is not included in the assessable value [Rule 10(1) of the CVR].
Commission paid to local agent of exporter is includible in the assessable value since
it is not buying commission.
(4) If insurance cost is not ascertainable, the same shall be added @ 1.125% of FOB
value of the goods [Rule 10(2) of the CVR].
(5) Cost of insurance, transport, loading, unloading, handling charges associated with
transshipment of imported goods to another customs station in India is not included
in the assessable value [Rule 10(2) of the CVR].
Question 3.
(a) Siddhi Ltd. is a registered manufacturer engaged in taxable supply of goods. Siddhi Ltd.
purchased the following goods during the month of January, 2019. The following particulars
are provided:
S. Particulars Input tax
No. (` )
1. Capital goods purchased on which depreciation has been taken on full 15,000
value including input tax thereon
2. Goods purchased from Ravi Traders (Invoice of Ravi Traders is 20,000
received in month of January, 2019, but goods were received in month
of March, 2019)
3. Car purchased for making further supply of such car. Such car is 30,000
destroyed in accident while being used for test drive by potential
customers
4. Goods used for setting up telecommunication towers being immovable 50,000
property
5. Goods purchased from Pooja Ltd. (Full payment is made by Siddhi Ltd. 10,000
to Pooja Ltd. against such supply, but tax has not been deposited by
Pooja Ltd.
6. Truck purchased for delivery of output goods 80,000
Determine the amount of input tax credit (ITC) available by giving necessary explanations
for treatment of various items as per the provisions of the CGST Act, 2017. You may
assume that all the necessary conditions for availing the ITC have been complied with by
Siddhi Ltd. (5 Marks)
(b) Dev Enterprises is the supplier of water coolers. Dev Enterprises supplied water coolers
to Vimal Traders for consideration of ` 2,95,000 (inclusive of GST @ 18%). Vimal Traders
also gave some materials to Dev Enterprises as consideration for such supply whose value
was ` 10,000 (exclusive of GST).
Dev Enterprises has supplied the same goods to another person at price of ` 2,97,360
(inclusive of GST @ 18%).
You are required to:
(1) Determine the value of goods supplied by Dev Enterprises to Vimal Traders as per
the provisions of the CGST Act, 2017.
(2) What would your answer be if price of ` 2,97,360 is not available at the time of supply
of goods to Vimal Traders? Explain briefly. (4 Marks)
(c) From the following particulars, you are required to determine reward under Merchandise
Exports from India Scheme (MEIS) under Foreign Trade Policy 2015-2020:
(1) Exports of handloom products through notified courier with FOB value of ` 5,15,000
per consignment.
(2) Exports of goods which are subject to minimum export price with FOB value of
` 50,000.
(3) Exports of goods where FOB value declared in shipping bill is ` 8,00,000. FOB value
realised with exchange gain is ` 8,20,000.
(4) Exports of books through foreign post office with FOB value of ` 4,95,000 per
consignment
(5) Biotechnology Park products exported through DTA units of ` 3,00,000
(6) Supplies made from DTA units to SEZ units of ` 2,00,000
(7) Rate of reward under MEIS is 7%. (5 Marks)
Answer
(a) Computation of ITC available with Siddhi Ltd.
S. Particulars Input tax
No. (` )
1. Capital goods Nil
[Since depreciation has been claimed on the tax component of
the value of the capital goods, ITC of such tax cannot be availed
in terms of section 16 of the CGST Act, 2017.]
2. Goods purchased from Ravi Traders Nil
[ITC in respect of goods not received cannot be availed (Section
16 of the CGST Act, 2017). Since the goods have been received
in the month of March 2019, ITC thereon can be availed in March
2019 and not January 2019 even though the invoice for the same
has been received in January 2019]
3. Cars purchased for making further supply Nil

[Though ITC on motor vehicles used for further supply of such
vehicles is not blocked, ITC on goods destroyed for whichever
reason is blocked (Section 17(5) of the CGST Act, 2017).]
4. Goods used for setting telecommunication towers Nil
[ITC on goods used by a taxable person for construction of
immovable property on his own account is blocked even when
such goods are used in the course or furtherance of business
(Section 17 of the CGST Act, 2017).]
5. Goods purchased from Pooja Ltd. 10,000
[ITC can be claimed provisionally in January 2019 since all the
conditions necessary for availing the same have been complied
with (Section 16 of the CGST Act, 2017).
However, the claim will get confirmed only when the tax charged
in respect of such supply has been actually paid to the
Government.]
6. Trucks purchased for delivery of output goods 80,000
[ITC on motor vehicles used for transportation of goods is not
blocked (Section 17(5) of the CGST Act, 2017).]
Total ITC available with Siddhi Ltd. 90,000
Note: The above answer is based on the assumption that the ITC available is to be computed for
the month of January, 2019. However, since the question does not specify the period for which
ITC available is to be computed, the question may also be answered without referring to any
particular period.
(b) (1) In the given case, price is not the sole consideration for the supply. Apart from
monetary consideration, the buyer has given some material to the supplier as
consideration for such supply. Hence, the value of the supply cannot be determined
on the basis of the transaction value in terms of section 15(1) of the CGST Act, 2017.
Here, the value will be determined with the help of rule 27 of the CGST Rules, 2017
(Valuation Rules) which specifies that where the consideration for a supply is not
wholly in money, the value will be the open market value.
Open market value of a supply means the full value in money, excluding the
applicable GST, where the supplier and the recipient of the supply are not related and
the price is the sole consideration, to obtain such supply at the same time when the
supply being valued is made.
Therefore, in the given case, the open market value of the goods supplied is
` 2,52,000 (` 2,97,360 x 100/118) and is therefore, the value of such goods.
(2) Rule 27 further provides that if open market value of the supply is not known, the
value of the supply will be the consideration in money plus the m oney equivalent to
the non-monetary consideration, if such amount is known at the time of supply.
Therefore, the value in the given case will be (` 2,95,000x 100/118) + ` 10,000, which
is ` 2,60,000.
(c) Computation of rewards under MEIS
Particulars Amount
eligible for
reward (`)
Export of handloom products through courier 4 with FOB value 5,00,000
` 5,15,000
[Export of handloom products of FOB value upto ` 5,00,000 per
consignment is entitled for reward under MEIS.]
Export of goods which are subject to minimum export price [Ineligible Nil
for MEIS]
Export of goods where FOB value declared in shipping bill is ` 8,00,000 8,00,000
and FOB value realized is ` 8,20,000
[FOB value declared in the shipping bill or the FOB value realized,
whichever is lower is considered for MEIS rewards]
Export of books through foreign post office 5 with FOB value of 4,95,000
` 4,95,000
[Export of books of FOB value upto ` 5,00,000 per consignment is
entitled for reward under MEIS.]
Biotechnology Park products exported through DTA units [Ineligible for Nil
MEIS]
Supplies made from DTA units to SEZ units [Ineligible for MEIS] Nil
Total amount eligible for MEIS reward 17,95,000
MEIS reward @ 7% 1,25,650
Question 4
(a) Yash Shoppe, a registered supplier of Jaipur, is engaged in supply of various goods and
services exclusively to Government departments, agencies, local authority and persons notified
under section 51 of the CGST Act, 2017.
4 It has been assumed that exports have been made using e-commerce platform.
5 It has been assumed that exports have been made using e-commerce platform.
You are required to briefly explain the provisions relating to tax deduction at source under
section 51 of the CGST Act, 2017 and also determine the amount of tax, if any, to be
deducted from each of the receivables given below (independent cases) assuming that the
payments as per the contract values are made on 31.10.2018. The rates of CGST, SGST
and IGST may be assumed to be 6%, 6% and 12% respectively.
(1) Supply of computer stationery to Public Sector Undertaking (PSU) located in Mumbai.
Total contract value is ` 2,72,000 (inclusive of GST)
(2) Supply of air conditioner to GST department located in Delhi. Total contract value is
` 2,55,000 (exclusive of GST)
(3) Supply of generator renting service to Municipal Corporation of Jaipur. Total contract
value is ` 3,50,000 (inclusive of GST) (5 Marks)
(b) Happy Company is a registered supplier of electric goods. It has three stores for electric
goods in Jodhpur (Rajasthan) namely Ram Store, Shyam Store, Mohan Store. It receives
an order for supply of electric goods worth ` 1,40,000 (exclusive of GST @ 18%) from
Kishan Sons of Bhopal (Madhya Pradesh). Happy Company found that order worth
` 43,000 can be fulfilled from the company's Ram Store, order worth ` 45,000 can be
fulfilled from its Shyam Store and remaining goods worth ` 52,000 can be sent from its
Mohan Store. All three stores are instructed to issue separate invoices for the goods sent
to Kishan Sons. The goods are transported to Kishan Sons in Bhopal in a single
conveyance owned by Shiv Transporters.
You are required to advise Happy Company with regard to issuance of e-way bills as per
the provisions of the CGST Act, 2017. (4 Marks)
(c) Laxmi Company imported goods valued at ` 10,00,000 vide a Bill of Entry presented before
the proper officer on 15 th December, 2018, on which date the rate of customs duty was
20%. The proper officer decided that the goods should be subject to chemical or other test
and therefore, the same were provisionally assessed at a value of ` 10,00,000 and Laxmi
company paid provisional duty of ` 2,00,000 on the same date. Laxmi Company wants to
voluntarily pay duty of ` 1,50,000 on 20th January, 2019.
(1) Can Laxmi Company provisionally pay the duty and what are the conditions which are
to be complied before such payment is made?
(2) Determine the amount of interest payable, if any, under section 18 of the Customs
Act, 1962 assuming that the payment of ` 1,50,000 as stated above is made on
20th January, 2019 and that the final duty is assessed on 31 st January, 2019 at
` 4,00,000 and the balance duty is paid on the same day. (5 Marks)
Answer
(a) As per section 51 of the CGST Act, 2017, Government departments, agencies, local
authority and notified persons are required to deduct tax @ 2% (1% CGST + 1%
SGST/UTGST) or IGST @ 2% from payment made to the supplier of taxable goods and/
or services where the total value of such supply [excluding tax and compensation cess
indicated in the invoice], under a contract, exceeds ` 2,50,000.
Since in the given case, Yash Shoppe is supplying goods and services exclusively to
Government departments, agencies, local authority and persons notified under section 51
of the CGST Act, 2017, applicability of TDS provisions on its various receivables is
examined in accordance with the above-mentioned provisions as under:
S. Particulars Total Tax to be deducted
No. contract CGST SGST IGST
value due @ 1% @ 1% @ 2%
to be (` ) (`) (`)
received
[excluding
GST] (`)
(1) Supply of computer stationery to PSU in 2,42,857 -- --
Mumbai [2,72,000 ×
[Since the total value of supply under 100 / 112]
the contract [excluding IGST (being
inter-State supply)] does not exceed
` 2,50,000, tax is not required to be
deducted.]
(2) Supply of air conditioner to GST 2,55,000 -- 5,100
Department in Delhi
[Since the total value of supply under
the contract [excluding IGST (being
inter-State supply)] exceeds
` 2,50,000, tax is required to be
deducted.]
(3) Supply of a generator renting service to 3,12,500 3,125 3,125
Municipal Corporation of Jaipur [3,50,000×
[Since the total value of supply under 100 / 112]
the contract [excluding CGST and
SGST (being intra-State supply)]
exceeds ` 2,50,000, tax is required to
be deducted.]
(b) Rule 138 of the CGST Rules, 2018 stipulates that e-way Bill is mandatorily required to be
generated if the goods are moved, inter alia, in relation to a supply and the consignment
value [including CGST, SGST/UTGST, IGST and cess charged] exceeds ` 50,000.
Further, the FAQs on E-way Bill issued by CBIC clarify that if multiple invoices are issued
by the supplier to one recipient, multiple e-way bills have to be generated - one e-way bill
for each invoice. Each invoice is considered as separate consignment for the purpose of
generating e-way bills.
In the given case, consignment value of goods supplied against separate invoices from
Ram Store, Shyam Store and Mohan Store is ` 50,740 [` 43,000 × 118%], ` 53,100
[` 45,000 × 118%] and ` 61,360 [` 52,000 × 118%] respectively.
Thus, Happy Company is required to prepare 3 separate e-way bills since value of each
invoice exceeds ` 50,000.
(c) (1) Provisional assessment of duty is permitted in case where the proper officer deems
it necessary to subject any imported goods or export goods to any chemical or other
test [Section 18 of the Customs Act, 1962]. Thus, Laxmi Company can pay the duty
on provisional basis.
Before, the provisional assessment of duty, the importer must furnish such security
as the proper officer deems fit for the payment of the deficiency, if any, between the
duty finally assessed/re-assessed and the duty provisionally assessed.
(2) Section 18 of the Customs Act, 1962 further stipulates that the importer is liable to
pay interest, on any amount payable consequent to the final assessment order @
15% p.a. from the first day of the month in which the duty is provisionally assessed
till the date of payment thereof.
Accordingly, amount of interest payable will be
= [` 1,50,000 x 15% x 51/365] + [` 50,000 x 15% x 62/365]
= ` 3,144 + ` 1,274
= ` 4,418
Question 5
(a) From the following details, calculate the amount to be paid, for release of goods detained
or seized under section 129 of the CGST Act, 2017, if owner of the goods does not come
forward for payment of applicable tax and penalty
Details are as follows:
Particulars Amount (` )
Value of goods 30,00,000
Applicable GST on such goods 5,40,000
GST already paid on such goods 3,60,000
Would your answer be different if goods were exempted from GST and value remains the
same namely ` 30,00,000? (5 Marks)
(b) On 05.07.2018, a show cause notice for ` 5,00,000 was issued to Mr. Vijay Kumar Sharma
demanding short payment of GST of ` 4,50,000 for the month of January, 2018 and also
interest of ` 50,000.
Mr. Sharma raised objections and after personal hearing on 30.08.2018, adjudicating
authority passed the final order for ` 3,50,000 for GST, without any reference with regard
to payment of interest.
Mr. Sharma deposited the tax of ` 3,50,000 on 02.09.2018 and informed the department
on the same day. Subsequently, on 15.09.2018, department demanded payment of interest
of ` 60,000 on GST of ` 3,50,000.
Mr. Vijay Kumar Sharma is not ready to pay any interest. His contention is that he is not
liable for interest because he deposited all the amount specified in the final adjudication
order.
Examine with a brief note the validity of the action taken by the Department with reference
to provisions of the CGST Act, 2017. (4 Marks)
(c) Briefly explain the procedure in appeal to be followed by the Commissioner (Appeals)
under section 128A of the Customs Act, 1962. (5 Marks)
Answer
(a) If owner of the goods does not come forward for payment of applicable tax and penalty,
the amount to be paid for release of goods detained or seized under section 129 of the
CGST Act, 2017 is applicable GST and penalty equal to 50% of the value of the goods
reduced by the tax amount paid thereon.
Therefore, in the given case, the amount payable = [` 5,40,000 + 50% of ` 30,00,000] –
` 3,60,000 = ` 16,80,000
However, in case of exempted goods, amount to be paid for release of goods detained is
equal to 5% of the value of goods or ` 25,000, whichever is less.
= 5% of ` 30,00,000 or ` 25,000, whichever is less
= ` 1,50,000 or ` 25,000, whichever is less
= ` 25,000
(b) As per section 75 of the CGST Act, 2017, the interest on the tax short paid has to be paid
whether or not the same is specified in the order determining the tax liability.
Thus, in view of the same, Mr. Vijay Kumar Sharma will have to pay the interest even
though the same is not specified in the final adjudication order. His contention that he is
not liable for interest because he deposited all the amount specified in the final adjudication
order is not valid in law.
However, the amount of interest demanded in the order cannot be in excess of the amount
specified in the notice.
Therefore, in the given case, Department cannot demand the interest in excess of the
amount specified in the notice, which will be ` 50,000.
(c) The procedure in appeal to be followed by the Commissioner (Appeals) under section 128A
of the Customs Act, 1962 is as under:-
Commissioner (Appeals) shall give an opportunity to the appellant to be heard if he so
desires. He may allow the appellant to go into any ground of appeal not specified in the
grounds of appeal, if the omission was not willful or unreasonable.
He shall pass an order:
(a) confirming, modifying or annulling the decision or order appealed against; or
(b) referring the matter back to the adjudicating authority with directions for fresh
adjudication or decision
He shall not pass any order enhancing the penalty, fine etc . without hearing the appellant.
He shall not pass any order requiring the appellant to pay any duty not levied, short-levied
or erroneously refunded without giving a notice to the appellant.
The order disposing of the appeal shall be in writing and shall state the points for
determination, the decision and the reasons thereof. He shall, where it is possible to do
so, hear and decide every appeal within a period of 6 months from the date on which it is
filed.
On the disposal of the appeal, the order passed shall be communicated to the appellant,
the adjudicating authority, Principal Chief Commissioner/ Chief Commissioner and
Principal Commissioner/ Commissioner.
Question 6
(a) Briefly explain whether an appeal could be filed before the Appellate Authority against
order of Authority for Advance Ruling (AAR), with reference to sections 100 and 101 of the
CGST Act, 2017. (4 Marks)
(b) Explain the recourse that may be taken by the officer in case proper explanation is not
furnished for the discrepancy detected in the return filed, while conducting scrutiny under
section 61 of the CGST Act, 2017. (5 Marks)
OR
Explain the provisions relating to rectification of error apparent on the face of record under
section 161 of the CGST Act, 2017. (5 Marks)
(c) Explain the modes for service of notice, order, etc. under section 153 of the Customs Act,
1962. (5 Marks)
Answer
(a) Yes, the concerned officer, jurisdictional officer or applicant aggrieved by any advance
ruling may appeal to the Appellate Authority for Advance Ruling (AAAR) within 30 days
[extendible by another 30 days] from the date on which such ruling is communicated to him
in the prescribed form and manner.
The AAAR must pass an order confirming or modifying the ruling appealed against within
a period of 90 days of the filing of an appeal, after hearing the parties to the appeal.
If members of AAAR differ on any point referred to in appeal, it shall be deemed that no
advance ruling can be issued in respect of the question under appeal. A copy of the
advance ruling pronounced by the AAAR is sent to applicant, concerned officer,
jurisdictional officer and to the Authority.
(b) If proper explanation is not furnished for the discrepancy detected in return filed, while
conducting scrutiny under section 61 of the CGST Act, 2017, the proper officer may:
(i) conduct audit of the registered person under scrutiny,
(ii) direct the registered person under scrutiny to get his records including books of
account examined and audited by the Chartered Ac countant or a Cost Accountant,
(iii) the Chartered Accountant or a Cost Accountant shall be a person/firm as nominated
by the Commissioner,
iv) exercise the powers of inspection, search and seizure with respect to registered
person under scrutiny, or
(v) proceed to determine the tax and other dues of the registered person under scrutiny.
OR
(b) Section 161 of the CGST Act, 2017 lays down that any authority, who has passed/issued
any order, notice, decision, certificate or any other document, may rectify any error which
is apparent on the face of record, in such documents, either on its own motion or where
such error is brought to its notice by any officer appointed under GST law or by the affected
person.
Such rectification of errors which is apparent on the face of record, in such documents, is
to be made within a period of three months from the date of issue of such document. Such
rectification cannot be done after a period of 6 months from the date of issue of such
document.
However, where rectification is purely in the nature of correction of a clerical/arithmetical
error, arising from any accidental slip/omission, then the limitation period does not arise .
Principles of natural justice should be followed by the authority carrying out such
rectification, if it adversely affects any person.
(c) The notice, order, etc. may be served in any of the following modes under section 153 of
the Customs Act, 1962, namely:—
(i) by giving or tendering it directly to the addressee or importer or exporter or his
customs broker or his authorised representative including employee, advocate or any
other person or to any adult member of his family residing with him;
(ii) by a registered post or speed post or courier with acknowledgement due, delivered
to the person for whom it is issued or to his authorised representative, if any, at his
last known place of business or residence;
(iii) by sending it to the e-mail address as provided by the person to whom it is issued, or
to the e-mail address available in any official correspondence of such person;
(iv) by publishing it in a newspaper widely circulated in the locality in which the person to
whom it is issued is last known to have resided or carried on business;
(v) by affixing it in some conspicuous place at the last known place of business or
residence of the person to whom it is issued and if such mode is not practicable for
any reason, then, by affixing a copy thereof on the notice board of the office or
uploading on the official website, if any.

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PAPER – 5: ADVANCED MANAGEMENT ACCOUNTING

Question No.1 is compulsory.

Time Required per unit (hrs.) 6 4 3

Optimal Schedule is-

= 160 employees × (250 units + 60% × 250

You are required to calculate:

(ii) Statement Showing Rates for Each Class

(a) Margin Earned (`) 98,000 77,000 92,000 80,000

Fixed Cost 4,00,000

Particulars Amount (`)

Note: Selling commission will be not incurred on internal transfer units

Note: Selling commission will be not incurred on internal transfer units

(ii) The Two Transfer Prices Based on Opportunity Costs

Cash balance as on 31st May, 2019 ` 75,000

Factory Warehouses Capacity

Demand 75/60/0 20/10/0 50/10/0 145

Direct labour cost 15 27 60

Optimum Labour Hours Allocation

(No. of Visits × `2,000) (8 × `2,000) (3 × `2,000) (10 × `2,000) (2 × `2,000)

(i) Focus on synchronizing the production flow than on idle capacities.

summarising transactions into monthly, weekly or period end balances.

(i) Electronic Form

a digital signature created by the private key.

determine the selection of appropriate BCM strategies in the next process.

analyze performance or internal operations e.g. EIS (Executive Information System),

expenditure under section 37. Since the

[Factory licence fee in respect of leased

of payment for voluntary retirement

2 Mysore Minerals Ltd. v. CIT (1999) 239 ITR 775 (SC).

[On first ` 3,00,000 of book profit, 90% of 6,60,000

Depreciation of assets given on lease 90,000

business or profession @7.5% of the total amount received

[See Working Note 2] 96,00,000

deducting expenses of ` 60,000) 3,40,000 5,35,000

6 CBDT Circular No. 9/2012 dated 17.10.2012

8 It is presumed that the shares are unknown.

(2) Computation of common credit

Following additional amounts paid by ABC Industries Ltd:-

(ii) Supply of kits to Ram Fancy Store 5,05,000 70,700 70,700

However, since chairs and coolers

in the State of Rajasthan.

(b) Computation of assessable value of the imported goods

3. Cars purchased for making further supply Nil

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